There are benefits to paying corporation tax on your actual profits.

This week I had to pay my first corporation tax bill.

You set up your limited company and it feels like the tax deadline is a mirage in the distance and it never arrives.

But the day arrives and it’s finally due, 9 months and a day after your year-end.

I have never had to pay that much tax, it was hanging over me until the money left the bank.

Benefits to paying corporation tax

There’s always a temptation to shave that extra bit of tax off; a bit more mileage, or an expense that hasn’t been included.

It’s so easy and tempting as an accountant to be all about reducing corporation tax and that is part of my job. But I think there are huge benefits to saying YES I have made a profit, I have had a good year and with that, I need to pay corporation tax. Here are the benefits of paying corporation tax on your actual profits:

  1. It should be celebrated – If you are paying corporation tax, it means you have made a pre-tax profit, which is to be celebrated.
  2. More profit for dividends – You can benefit from all the hard work and declare dividends with the profit or retained earnings you have created.
  3. Better credit rating – The profits you have declared create a healthier balance sheet, increasing your business credit rating.
  4. You can feel good – Knowing you have declared everything and paid your tax with no fudging!
  5. You can benchmark – When you see your accounts, you know they’re the correct figures and it acts as an accurate comparison for next year.
  6. You can decide when you take it personally – The benefit of a limited company is you will only be paying 19%-25% of the profits, you won’t be taxed on all the profits personally, you can decide when you extract money from the business.

How to make paying corporation tax easier

It doesn’t have to be a last minute stress, trying to rummage around trying to find thousands of pounds. Here are a few things that you can do to make paying the corporation tax easier and less stressful:

  • Prepare your accounts early – You have 9 months and a day to pay your corporation tax, but they can be prepared the day after your year-end, so you know exactly how much you owe to HMRC. I knew 6 months ago, what my tax liability was and it definitely helps feeling prepared.
  • Save a % of sales on autopilot – With a lot of the new banks like Monzo, Starling and Tide, this can be done automatically or you can do it manually every week or month. Pick a % and save as you go without having to think about it. I saved 20% of sales. Depending how many costs you have, I would recommend 20%-25%, which means you would likely be over saving.
  • Earn interest on your corporation tax savings – Your corporation tax savings could be sitting in a bank for up to 21 months, so you may as well try and maximise the interest you’re receiving. I was moving bigger chunks to a Tide savings account, to take advantage of the savings interest rate.

If you’re interested in the first-year results of Every Cloud, which I was paying corporation tax on, here they are: Every Cloud Accounting Results

Tax isn’t always bad and I genuinely feel good and a sense of relief now it’s paid, even if the bank balance is a bit lower.

If you would like to work with an accountant who supports you to grow your service business and be proactive with your corporation tax, book a discovery call today.