This article will examine what happens if you pay your corporation tax early, which can be a win-win situation if the funds are available.
Table of Contents
Her Majesty’s Revenue and Customs (HMRC) will pay you interest on tax repayments when you overpay your taxes. This is known as “repayment interest.”
HMRC also has a little-known policy regarding corporation tax only that can benefit companies: it also pays interest on early corporation tax payments, known as “credit interest,” just like a bank does on an interest-bearing account.
This “credit interest” can help you earn additional interest you might not be getting on your bank accounts.
The above screenshot shows an HMRC Corporation Tax account that has received both “repayment” and “credit” interest.
HMRC Corporation Tax “credit interest” in summary
- It’s always good to check the latest repayment rate on the official HMRC website and other potential returns from different banks. The HMRC interest rates are set in legislation that links them to the Bank of England base rate minus 1%.
- The repayment interest rate compensates you fairly for the loss of the use of your money see example 1
- To prevent you from using HMRC as an interest-generating service, they only pay interest on early payments of tax, not on overpayments, which they will return to you see example 2
- Interest received from HMRC is taxable income like any other interest received see example 3
- HMRC pays interest from the date you pay Corporation Tax to the payment deadline. The earliest date they would pay interest is 6 months and 13 days after the start of your accounting period see example 4
- The interest will be allocated to your HMRC tax account nine months and one day after the company year-end. This is the date the payment is due to HMRC.
- Add the bank account details to your Corporation Tax return so HMRC can pay your bank account directly. You may be inconvenienced by having a cheque posted to your registered office without them.
- Check with your accountant or HMRC, who will be able to provide you with the payment reference you need. Your 17-digit payment reference to quote HMRC changes yearly by increasing the last number digit by one. If you paid using 1234567890A00126A the previous time, you must use 1234567890A00127A. Updating the reference each year with each new payment is essential for HMRC to match it to the correct accounting period. Without this update, HMRC will likely return your tax payment if you have already settled tax liability for the year your reference is matched against. You can check with your accountant, and HMRC will be able to provide you with the reference you need.
- If there is any outstanding Corporation Tax liability to HMRC, the interest will be allocated to this rather than repaid.
- Small sums of interest, typically under £100, are not repaid and carried forward to offset future tax liabilities or added to future repayments.
Example 1: How do HMRC calculate the repayment interest if I pay my Corporation Tax early?
Darren is a savvy associate dentist and learns that HMRC will pay interest if he pays his corporation tax early.
His accountant prepared and filed his March year-end accounts and corporation tax return with HMRC on 30 April and gave Darren the HMRC payment reference to pay his Corporation Tax by the due date of 1 January, which is nine months and one day after his year-end.
Darren has a surplus of cash funds that are not earning any interest and has decided to take advantage of the HMRC repayment interest and pay his corporation tax early on 1 May.
Darren’s company will now earn 245 days of repayment interest from HMRC, which they will pay him on 1 January.
Example 2: Can I overpay my Corporation Tax to earn interest?
Davina is a savvy associate dentist and learns that HMRC will pay interest if she pays his corporation tax early.
Davina has a surplus of cash funds that are not earning any interest. She has decided to take advantage of the HMRC repayment interest and pay her £20,000 corporation tax early, including an extra £5,000 to earn interest.
Davina’s company will now earn repayment interest from HMRC on its £20,000 tax liability, but not the £5,000 overpayment, which is returned to her without interest.
Example 3: How do I pay the Corporation Tax on the interest HMRC pay me?
Demian is a savvy associate dentist who earned £750 in interest from HMRC on paying his company’s Corporation Tax early.
This £750 forms part of the company’s taxable profits and is taxed at the company’s corporation tax rate of 25%.
Demians company will pay £187.50 in extra Corporation Tax to HMRC on the interest it has received.
Example 4: What is the earliest opportunity for me to pay my corporation tax to HMRC to start earning interest?
Devon is a savvy associate dentist and knows the earliest date HMRC pay interest is 6 months and 13 days after the start of your accounting period.
He knows the start of his accounting period is 1 January, which works out as 14 June, when HMRC will start to pay interest.
He calculates his pending tax liability and pays a lump sum to HMRC, knowing he will begin to accrue interest.
Where can I earn a reasonable interest rate if I still have surplus cash funds in my company?
We see many of our customers with large amounts of cash in their companies, either because they are saving for a specific purchase like purchasing a dental practice or simply because they don’t want to pay personal taxes at higher rates to extract it.
Whilst we can’t give specific advice on investing, if you are in this position and want to make this money ‘sweat,’ Some of our customers are currently getting good returns by depositing their company funds with:
- Flagstone – This platform, not a bank, allows you to spread your money between different banks and has access to the top rates of interest banks currently offer. FSCS protects you via the underlying bank. The minimum deposit required to open a Flagstone account is currently £100,000 for companies, and they take a fee of the interest you earn.
- Alicia Bank – This bank is well known for its business customer service and market-leading interest rates. You will need to deposit £20,000 to open an account with them.
