Corporation Tax Guide - Quarterly Instalment Payments

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For companies subject to UK corporation tax, quarterly instalment payments (QIPs) apply to large businesses. These payments help them distribute their tax liabilities across the year. Calculated based on the company’s estimated current-year tax liability, they support effective cash flow management while ensuring compliance with HMRC regulations.

Upcoming sections of this guide contain details of corporation tax, explain how to pay in instalments, discuss the impact of accounting periods, and discuss unique considerations for small companies.

MMBA simplifies tax complexities, empowering businesses to make informed decisions and stay on top of their financial responsibilities. If your actual tax differs from your estimate, you’ll need to make extra payments at the end of the year. Need help managing your corporate tax effectively? Discover our comprehensive corporate tax services designed to simplify the process.

Understanding Corporation Tax

A corporation tax is a tax on company profits. It is chargeable to resident companies of any legal status including limited companies, foreign companies having branches in the UK, and unincorporated associations. This tax is applied to a company’s taxable profits, which generally consist of:

Trading profits from business operations
Investment income such as dividends or interest
Profits from the sale of assets, including property or equipment

The current corporation tax in the UK is 25%. However, businesses need to stay informed about potential changes in tax policies, as rates can fluctuate. Properly understanding how corporation tax is calculated helps companies, regardless of their size, to budget effectively and meet their obligations on time.

How Your Accounting Period Impacts Corporation Tax Instalments

The accounting period of your business is very vital when it comes to how and when you pay corporation tax payments particularly when operating under the quarterly instalment payments regime. This system is meant for large companies, and its main aim is that tax payment is made at some instants all through the tax accounting period and not only by the end of the year. It is thus crucial to understand how your accounting period impacts your corporation tax liability to manage your instalment payments efficiently.

What is the Accounting Period?

The accounting period is defined as the period for which a company organises its accounts and prepares financial statements. It is usually one year for corporation tax purposes but need not be more than this. If your accounting period is more than 12 months, then for tax, the accounting period will be divided into two and each of them will be regulated by different rules.

Aligning Corporation Tax with the Accounting Period

Corporation tax is calculated by looking at the profits you earned from a business in the course of its accounting periods and then applying the tax rates imposed. Key dates, such as the due date for payment, are determined by the end of the accounting period. Larger firms are required to pay the first instalment, at least, six and a half months after the beginning of the tax accounting period, and the remainder in equal instalments.

For example:

A company with a 12 months accounting period ending on 31 March would have the first instalment due on the 14th October of the same year.
The next instalments would be spaced after a similar period of three months (i.e., the 14th of January, and the 14th of April).

Impact of Large Company Rules

According to company rules business is considered a large company for tax purposes if the amount of taxable profit of the business is more than £1.5 million, and other companies that are associated with it. Large companies are under obligation to pay taxes for the financial year in quarterly instalments whereby four instalments within a year are permitted.

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Changes for Very Large Companies

For very large companies, where taxable profit exceeds £20 million, such payments are made at an even faster pace. The first payment is due just two months and 13 days into the accounting period.

Handling Irregular Accounting Periods

When a company’s accounting periods beginning and ending dates don’t align with the standard 12 months (e.g., due to a newly formed company or a change in its financial year), the payment schedule adjusts accordingly. For example, if a company has a short first accounting period, tax is adjusted, and separate rules apply to calculate the first instalment payment.

Avoiding Interest and Penalties

Interest and Penalty are two of the most important factors that one would prefer to avoid at all costs because they eat deep into the principal amount. If the company is unable to make instalments on time or pays lower than the owed amount, interest will be paid by the company. Likewise, there are further penalties in situations where a company deliberately fails to pay its corporation tax bill. Some of these problems can be checked if the company’s accounting period is properly set and controlled.

Planning for Corporation Tax Instalments

Periodically, review the end of the accounting period to provide a correct company tax return.
Monitor the number of associated companies to determine eligibility for instalments.
Prepare for the third instalment and subsequent payments by forecasting taxable profits.

Most organisations register their corporation tax payment regime on their accounting period so that they do not incur unnecessary penalties or interests on tax dues.

The Pattern of Quarterly Instalment Payments

It is mandatory for large companies, having a 12 month accounting period, to pay corporation tax payments in instalments every quarter. These are paid in equal portions of four equal instalments spread over the financial year.

The first instalment payment is made and payable after six months and 13 days upon the beginning of the accounting period and other instalment payments are payable every three months. The last and final instalment payment is due three months and 14 days after the end of the accounting period. For example, a company whose accounting period starts on the first of January would have four instalments due on the 14 July, 14 October, 14 January of the next year, and 14 April of the following year.

Further, if the accounting period is for more than twelve months or if it is less than twelve months, separate rules apply for determining instalment payments.

Payment Patterns for Growing Companies

When a growing company enters the large company category, then it will make instalments every quarter if it qualifies as a large company for two years consecutively.

For example, assume an enterprise with a 31 December year end that becomes large in 2022 and maintains its large company status in 2023. Here’s how its tax payments would look:

For the 2022 accounting period, the tax liability is due nine months and one day after the end of the accounting period—on 1 October 2023.
For the 2023 accounting period, the company must pay 25% of its estimated corporation tax liability on 14 July 2023, 14 October 2023, 14 January 2024, and 14 April 2024.

In this case, the first payment for the year 2023 is required before the corporation tax liability for the year 2022 is due. Proper estimation of taxable profits is vital together with realistic financial forecasting to enable organisations to meet the quarterly instalment payments.

For Large Companies

From 1 April 2019, very large companies are allowed to pay corporation taxes four months in advance than large companies. Very large companies are defined as those firms with a taxable profit in an accounting period for a business exceeding £20 million. However, this threshold is subject to proportionate reduction for the accounting periods less than 12 months and for the company that has associated companies.

For accounting purposes, a company with one or more associated companies will have its £20 million threshold divided by the number of associated companies, including itself. Also, it is to mark that the minimum threshold of £10,000 for excluding instalment payments is also applicable to very large companies.

A very large company with a standard 12 month accounting period is required to make quarterly instalment payments on the 14th day of the third, sixth, ninth, and twelfth months of the accounting period of a year. For example, companies with accounting periods beginning on 1st January must make payments on 14th March, 14th June, 14th September and 14th December.

Effective planning and reliable estimation assist in adhering to the corporation tax law and regulation, thus avoiding penalties for late payment and reducing the interest paid on underpayments. This is particularly important for those businesses that are transitioning to large Company status or working as very large Companies.

How to Pay Corporation Tax in Instalments?

Fulfilling the corporation tax is a legal requirement of all companies operating within the United Kingdom. Some firms’ process involves making instalments in their accounting period. This method assists businesses to better manage their corporation tax liability. In this section, we’ll set out how to pay corporation tax in quarterly instalments and why non-compliance should be avoided.

Understand the Quarterly Instalment Payments Regime

The quarterly instalment payments regime is applicable to large companies and very large companies that have taxable profits over £1.5 million. These rules make these businesses pay four equal instalments on their 12 months accounting period in order to clear their corporation tax payment.

Key points to understand:

Large companies that make profits over £1.5 million have to follow this system.
Very large companies with profits exceeding £20 million are however given slightly shorter payment periods.
However, if your business has associated companies, the £1.5 million value is split by the number of associated companies. For example, if there are three associated companies, the above amount is reduced to £375,000.

Payment Schedule for Corporation Tax

For a typical 12 month accounting period, the quarterly instalments are due as follows:

First instalment payment: After 6 months and 13 days from the beginning of the accounting period.
Second instalment: 9 months and 13 days after the start.
Third payment: 12 months and 13 days after the start.
Fourth and final instalment: 15 months from the date at which the current accounting period began.

How to Calculate Instalment Payments

It is usual to make instalment payments based on estimated tax amounts. Companies use their company’s estimate, which is the current year’s tax liability to know the amounts. These estimates should be updated as the accounting period progresses to improve the accuracy of the accounts.

Tips for calculating payments:

Use your estimated tax for the year when determining the instalment payment you wish to make.

It is advisable to use reliable variants of the financial software or contact a financial professional to avoid mistakes.

If your actual corporation tax liability differs from the estimates, you`ll need to pay additional top up payments to the tax department at the end of the accounting period.

Using reliable tools like Xero is a smart choice. Its instalment payment calculator simplifies managing your corporation tax, making tax planning straightforward.

Consequences of Late or Underpaid Instalments

If you are unable to make instalment payments on time then it can lead to interest paid on late or underpaid instalments. HMRC imposes penalties if a company deliberately fails to meet its obligations.

Special Rules for Short or Extended Accounting Periods

If your accounting period exceeds 12 months, then the payment cycle also changes. For example, instead of making four payments in a 12 month financial year, a 15-month accounting period would entail five payments. In the same way, for shorter periods, instalment payments are more compressed into fewer payments.

Payment Options and Deadlines

You can pay corporation tax through several methods:

Online bank transfer.
Direct debit.
By debit or corporate credit card.

Make sure you meet all tax deadlines to avoid penalties and maintain smooth financial operations.

Top Up Payments and Final Liability

When filing your corporate tax return, you will be able to determine your final tax liability and match this with the payments you’ve made. If you have overpaid in any way, HMRC will return the money to you. If you have underpaid then that means you have to pay for the remaining amount immediately.

Using Accounting Software

It becomes easier to do this process using modern accounting tools. They keep records of your tax payments, estimate the amount you owe in taxes, and ensure you do not miss any due date. So, using accounting softwares can greatly simplify this process for small businesses.

Corporation Tax Instalments-What Small Companies Need to Know

A general understanding of the system is required for most small businesses in the UK, although they do not make quarterly instalments. It makes companies ready for future growth and assists in tax payment management in the future more efficiently.

Who Needs to Make Quarterly Instalments?

As previously mentioned, small companies settled their corporation tax through a single payment made at the end of the accounting period. However, certain situations may require them to make instalment payments:
- If profits exceed £1.5 million or the threshold concerning associated companies.
- If a company is growing from a small scale to a large one.
- If associated company rules are applicable, it lowers the profit limits.

How Quarterly Payments Work for Small Companies

Even if not mandatory, small companies can voluntarily make quarterly payments. This helps spread the financial burden of paying corporation tax. Quarterly instalments work as follows:

Determine your current year tax liability.
Divide the total into four equal instalments.
Pay these instalments according to the prescribed schedule.

This approach is especially suitable for companies aiming to improve their financial performance.

Associated Companies and Thresholds

If you have associated companies, this £1.5 million threshold is split for all the companies that are associated with it. For example, if there are two linked bodies, each will have a £500,000 threshold.

Voluntary Instalments-Pros and Cons

Pros:

Better cash flow management
Avoid making large, one time tax payments at the accounting year end date.
Minimised risks of penalties for delaying or failing to complete corporation tax bills.

Cons:

Requires accurate forecasting of taxable profits.
Additional administrative effort.

When Do Dormant Companies Pay Corporation Tax?

Dormant companies are businesses that are registered with Companies House but are not actively trading or carrying out any significant financial transactions. Essentially, a dormant company is inactive for corporation tax purposes and is not generating income or profits.
For corporation tax purposes, an inactive (Dormant) company is normally disregarded if it carries out no business and has no trading income or gains. However, if they become active during the tax accounting period, then they will be required to submit a company tax return and make tax payable.

Steps to Avoid Penalties

Make sure to complete your tax returns correctly and timely.
Pay all taxes on time so that you do not have to deal with fines.
The instalment payments that you make must therefore be based on other sound estimated figures.
To calculate taxable profits, use accounting tools or professional help.

Planning for Growth

Even small companies should prepare for the possibility of becoming a large company. Start by:

Monitoring your current accounting period performance.
Staying updated with company rules related to quarterly instalments.
Using software to manage cash flow and estimate future liabilities.

Understanding quarterly instalment payments is vital for all businesses, including small companies. Being proactive helps manage corporation tax liability, avoid penalties, and maintain smooth operations. Whether you’re required to make quarterly instalments or not, learning about the system can help you prepare for the future.

Income Tax for Self-Employed Individuals and Partnerships

The income tax process for self-employed individuals revolves around two crucial due dates within a 12 month accounting period:

31 January:

- Make sure you submit your online tax return by this filing date.
- Pay the balance of tax owed for the current tax year.
- Make your first instalment payment (payment on account) towards the following year’s tax liability.

31 July:

- Make the second instalment payment for the next tax year.

Understanding Payments on Account

Payments on account are required if your first-year tax liability exceeds £1,000. These advance payments ensure that you consistently pay tax towards your income liability. On average each instalment payment is about 50% of the estimated tax for the next year.

For example:

If your current tax liability is £10,000:

By 31 January, you will pay £10,000 for the current year and £5,000 as the first payment on account for the next year, totaling £15,000.
By 31 July, you will pay the second instalment of £5,000.

Overpayments and Refunds

If your estimated payments on account exceed the actual tax liability for the next tax year, HMRC will issue a refund once your tax return is filed.

Special Considerations for Extended Accounting Periods

If your accounting period exceeds the standard timeframe or multiple businesses are managed by the same person, you may need tailored advice to ensure compliance.

Accurate record-keeping and timely submissions are critical to avoid penalties. Staying informed about key dates, including 31 March and 31 December, and using digital tools can simplify the process of managing tax obligations effectively.

Conclusion

Quarterly instalment payments (QIPs) are a vital component of corporation tax compliance for large UK companies. It offers a structured approach to managing tax liabilities and cash flow effectively.

Small companies, while often exempt from QIPs, must remain aware of their broader tax obligations and how accounting periods affect payment timelines. By understanding the intricacies of instalment patterns and related considerations, businesses can stay compliant and financially efficient.

If you want to stay on the right track through corporation tax complexities, then at MMBA we offer bespoke service to help you along the way. Partner with us for assistance through experienced guidance and tax management to help you with your long-term business growth.

FAQs

Can corporation tax be paid in instalments?

Yes, large companies must pay their corporation tax bill in quarterly instalments if their taxable profits exceed £1.5 million. These payments help manage cash flow and are based on estimated tax liabilities for the tax year.

Will small businesses have to pay 25% corporation tax?

No, small businesses with profits under £50,000 pay a lower rate of 19% under the small profits rate. The 25% rate applies to companies with profits over £250,000. For companies with profits between these thresholds, the rate is reduced, considering factors like associated companies and shared company interest.

Who needs to pay corporation tax quarterly?

Large companies with taxable profits exceeding £1.5 million must make instalment payments. The threshold is adjusted if the company has associated companies or if the accounting period is shorter than 12 months. Instalments typically follow a pattern based on the 31 March tax year end.

Can I pay corporation tax in two payments?

Corporation tax is generally paid in full by a single due date unless the company qualifies for instalments. For small companies, this is usually 9 months and 1 day after their accounting period ends. Quarterly instalments split payments into multiple parts, but two payments may apply for transitional cases.

Do you pay corporation tax if you make a loss?

If a company has made a loss it does not have to pay corporation tax but must still file a tax return. You can carry losses forward or backward to offset taxable profits from other tax years, reducing your corporation tax bills in the future.