# Understanding Corporation Tax

31 July 2017

At first glance, Corporation Tax may seem a tricky subject to understand. It's actually quite straightforward when you break it down into a few steps.

Here are the key points:

• Tax is calculated at 19% on your profit before tax
• You are then left with your profit after tax
• You can only take dividends out of your profit after tax

### Calculating your profit before and after tax:

 Sales £60,000 Telephone £600 Salary £11,000 Use of home office £208 Accountancy fees £1,200 Mileage £1,000 (£14,008) Profit before tax (sales - expenses) £45,992 Corporation tax @ 19% (£8738.48) Profit after tax (before tax - tax) £37,253.52
3. Total sales less total expenses = profit before tax
4. To work out your tax, multiply profit before tax by 19%
5. Profit before tax less the Corporation Tax is your profit after tax
6. You can only take dividends out of profit after tax

### How do you know how much money to keep in the company for taxes?

Let’s take a hypothetical scenario of a contractor who has a day rate of £500 (VAT ignored for ease of calculation) per day. Note that this is a simple example and many other factors do come into play when calculating your tax. The below is intended to give you a rough idea of your potential tax liability.

#### Step 1 – Estimate sales

Work out your total sales for the year:

• There are 5 days a working week
• 52 weeks in the year
• Deduct 4 weeks (or however many weeks holiday you plan to take)
• 48 paid weeks remaining in year

The calculation would be:

• £500 * 5 days = £2,500 per week
• £2,500 * 48 weeks = £120,000 per year

#### Step 2 – Estimate expenses

Work out your total expenses for the year. Your annual salary counts as an expense, so you can start with that and then estimate the figures.

 Salary £11,000 Accountancy fee £1,200 Mobile Phone £540 Mileage £1,350 Use of home office £208 Professional fees £300 Bank charges £180 Post & stationery £122 Sundry £100 £15,000
• Salary - we will always advise you in advance of the most tax efficient salary for the year
• Accountancy – simply multiply our fee by 12 months
• Mobile - You should put your mobile phone contract through the company as this is tax efficient. £45 per month for 12 months used as an example.
• Mileage – Take a sensible estimate of the number of business miles you drive throughout the year. Figure used here is 3000 miles @ 45p
• Use of home office – standard allowance of £208 per year
• Professional fees – estimate for any professional fees/membership subscriptions
• Post & stationery – estimate for paper/pens/books etc.
• Sundry – estimate for random bits and pieces through the year

#### Step 3 - Profit before tax:

Total sales: £120,000

Total expenses: £15,000

Profit before tax: £120,000 - £15,000 = £105,000

#### Step 4 – Work out your tax

Corporation tax is 19%, so simply:

£105,000 * 19% = £19,950

This means you would need to keep at least £19,950 in the business bank account to cover your tax bill.

#### Step 5 – Profit after tax

Profit before tax: £105,000

Less: Corporation tax: £19,950

Profit after tax: £85,050

This is the amount of dividends you could take out of the company. Remember you want to be tax efficient, have a read of our 17/18 tax guide for more info.

#### FreeAgent

If you use our FreeAgent software then you can simply go to to the Corporation Tax section and you will give a live estimate of your expected tax bill!