Corporation tax is an essential financial responsibility for businesses, and ensuring that it’s paid correctly and on time is crucial. One method of managing this tax obligation is by paying Corporation Tax by instalments. But when should you start paying it, and how can this benefit your business? In this blog, we will explore what paying corporation tax by instalments means, why it’s important, and the benefits of adopting this payment method. We will also discuss when your business should begin paying corporation tax in instalments.
What is Paying Corporation Tax by Instalments?
Corporation tax is a tax paid by limited companies and other organizations on their profits. Generally, this tax is due once a year, after the financial year has ended. However, for businesses that make a substantial amount of profit, HMRC (Her Majesty’s Revenue and Customs) requires that corporation tax be paid in instalments rather than a lump sum.
Paying Corporation Tax by instalments means dividing your corporation tax payment into smaller, manageable amounts, which are paid periodically throughout the year. This approach helps businesses to avoid paying a large sum at once and eases cash flow management.
Corporation tax instalments are typically required for businesses that owe over a certain threshold. This system ensures that companies don’t face a significant financial burden when the tax bill is due, and allows them to spread their liability over several months.
The Basic Requirements for Paying Corporation Tax by Instalments
Businesses are required to pay corporation tax in instalments if their annual taxable profits exceed £1.5 million. The amount you owe will be split into smaller payments, usually made in quarterly intervals. These payments are typically made in the months following the end of your accounting period.
Once your company reaches the threshold of £1.5 million in profits, your corporation tax payments become due in four instalments:
- First Payment – due six months and 13 days after the end of the accounting period.
- Second Payment – due nine months and 13 days after the end of the accounting period.
- Third Payment – due 12 months and 13 days after the end of the accounting period.
- Final Payment – due 15 months and 13 days after the end of the accounting period.
The exact due dates for your instalment payments will depend on the end date of your company’s accounting period.
Why is Paying Corporation Tax by Instalments Important?
Paying corporation tax by instalments is a critical aspect of business taxation for several reasons:
1. Helps Manage Cash Flow Effectively
Corporation tax payments can sometimes be substantial, depending on the size of your business. If a company has large profits, the tax bill can be equally large, which can be a significant financial strain. Paying the tax in instalments helps spread out the financial burden over time, allowing the company to manage its cash flow more effectively, often with the help of professional tax services to ensure compliance and accuracy.
Without instalment payments, a business would need to pay a lump sum, which can create cash flow challenges, especially if the company is relying on its profits to fund operations, expansion, or investment. Tax services can assist businesses in planning for and managing these payments, but instalment payments themselves are often seen as a way to prevent financial strain.
2. Avoiding Late Payment Penalties
Corporation tax is a legal obligation, and businesses are required to pay it on time. However, failing to meet tax deadlines can result in heavy penalties and interest charges. Paying in instalments can help reduce the risk of late payments by providing clear, manageable deadlines for each payment.
By breaking the tax obligation into smaller chunks, businesses are less likely to forget or delay payments. This ensures that businesses stay on track with their tax responsibilities and avoid unnecessary fines or interest charges.
3. Flexibility for Larger Businesses
For larger businesses that generate higher profits, paying a large lump sum at the end of the year may not be feasible. Paying corporation tax in instalments provides a level of flexibility for businesses to continue to operate smoothly without worrying about large one-time payments that could disrupt operations.
By making periodic payments, businesses with more significant profits can continue focusing on growth, expansion, or any ongoing projects without the distraction of a looming tax payment.
Benefits of Paying Corporation Tax by Instalments
Paying Corporation Tax by instalments offers numerous advantages for businesses. These benefits not only ensure compliance with tax regulations but also help businesses maintain healthy financial practices. Here are the key benefits:
1. Improved Financial Planning
For many businesses, budgeting and financial forecasting are part of the day-to-day process. Paying your corporation tax by instalments allows for better financial planning. With predictable, scheduled payments, businesses can forecast their cash flow with greater accuracy and prepare accordingly.
Knowing when each payment is due makes it easier to manage expenses and allocate resources for other financial needs. It also means that businesses can plan in advance, rather than scrambling to find funds when a large lump sum payment becomes due.
2. Reduced Risk of Cash Flow Disruptions
Large, one-off payments often disrupt the normal flow of a business’s finances. A substantial corporation tax bill can lead to challenges in paying suppliers, wages, or even paying for necessary investments. Paying taxes in instalments reduces this disruption, allowing businesses to continue operating without significant interruption.
The regular, smaller payments ensure that the business has a steady cash flow, which can be reinvested in operations or used to cover other costs without the financial strain that a lump sum payment might cause.
3. Simplified Tax Management
For businesses with complex tax obligations, managing tax payments can become a significant task. With quarterly instalments, businesses have a clearer understanding of their tax duties throughout the year, making it easier to keep track of payments and deadlines.
Quarterly payments also provide an opportunity to check the accuracy of your tax calculations throughout the year, reducing the chance of underpayment or overpayment. If your profits fluctuate, paying in instalments can help adjust the payments in line with your business’s financial performance.
4. Avoidance of Interest and Penalties
Corporation tax can be subject to interest charges if it’s not paid on time. When you pay by instalments, you reduce the risk of failing to meet the full payment on time. By spreading the payments, businesses avoid the financial burden of additional interest or penalties that could arise from late payment.
This is crucial for maintaining healthy financial records and avoiding complications with HMRC. As tax laws are strict, meeting deadlines for instalment payments ensures that businesses remain compliant with the tax authorities.
5. Easier for Growing Companies
As businesses grow, so do their tax liabilities. When a company reaches the point where it owes significant taxes, switching to instalments allows it to continue operating without facing sudden financial stress. As a company expands, its tax obligations grow, and paying in instalments can be a crucial factor in keeping that growth sustainable.
By spreading the tax payments, a growing company can avoid diverting resources from its core business activities, allowing for further investment and development.
When Should You Start Paying Corporation Tax by Instalments?
Now that we’ve outlined the benefits, the big question remains: when should your business start paying corporation tax by instalments? The answer to this depends on the profitability of your business and the structure of your accounting period. Below are some key indicators of when you should consider paying your corporation tax in instalments.
1. When Your Profits Exceed £1.5 Million
As previously mentioned, businesses with profits exceeding £1.5 million in a 12-month accounting period are required to pay corporation tax by instalments. The HMRC will notify you when your tax payments must be made in instalments, based on your annual profits. Once your taxable profits reach this threshold, you are obligated to pay in quarterly instalments.
2. When Your Business Has Consistent and Growing Profits
Even if your business doesn’t immediately hit the £1.5 million threshold, if your business consistently grows and your profits increase year over year, you may find that you eventually surpass this amount. At that point, your business will be required to switch to paying in instalments.
It’s important to keep an eye on your financial performance, as surpassing this threshold will require you to change how you manage your corporation tax.
3. At the Start of Your New Accounting Period
When your business reaches the threshold of £1.5 million in profits, you will begin paying corporation tax by instalments at the start of the following accounting period. For businesses with large and growing profits, this transition should be planned for in advance, as the payments will begin shortly after your financial year ends.
4. Planning for Future Tax Payments
If your business is nearing the £1.5 million profit mark, it’s essential to begin planning for instalment payments well in advance. Understanding when the requirement kicks in and how to set up a system for regular payments will ensure that your business remains compliant and financially stable.
Final Words
Paying Corporation Tax by instalments is a vital aspect of managing tax obligations for businesses with large profits. By splitting the tax burden into smaller, more manageable payments, businesses can better manage cash flow, avoid penalties, and plan for future tax obligations. It is especially important for businesses that are growing quickly or have already surpassed the £1.5 million profit threshold. Regular instalment payments provide flexibility, reduce financial strain, and ensure that a business stays on top of its tax duties, allowing owners to focus on growing and sustaining their operations.
For any business owner, understanding when to start paying corporation tax in instalments is key to long-term success. By being proactive about managing your tax responsibilities, you can ensure that your business is always prepared, compliant, and financially stable.
