What is deferred tax? Is this the question confusing you while maintaining the accounts of your company? The tax liabilities and maintaining their accurate record is an uphill task due to the various types of taxes and the time when they are due. In this blog, we will walk you through what the deferred payments are and they are used to maintain the balance sheet of a company. Moreover, we will discuss the process of managing the deferred payments with the help of some examples.

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What is Deferred Tax?

Deferred tax is a type of tax where a company has realised a tax but the due date to pay that tax has not yet arrived. As a result, this tax payment will be added to the accounts of a company as a deferred tax rather than the paid taxes and tax liabilities.

While calculating the corporate taxes, the limited companies go through many adjustments in the earned profits. For example, the depreciation of the assets allows the companies to claim the capital allowance instead of applying for the depreciation allowances.

As a result, the deferred taxes provide an opportunity for the companies to add deferred taxes to the corporation tax and the total tax expenses will be equal to the base rate of the corporation tax when the taxes will be paid.

In simple words, the taxes paid on a later date are called the deferred taxes and the corporate tax allows for certain adjustments before the tax is paid to avoid the overestimation of profits.

How Does the Deferred Tax Work?

There are two ways to work out deferred tax while calculating corporation tax in the UK. Let’s look at an example using the 2025 corporation tax rates.

Let’s suppose Company A has a profit before depreciation and tax of £5,000. The company buys office equipment worth £1,800, which is depreciated over 3 years, so the annual depreciation is £600.

Accounting Profit:

• £5,000 – £600 (depreciation) = £4,400

This is the accounting profit, which is shown in the company’s financial statements.

Taxable Profit:

However, HMRC doesn’t accept depreciation for tax purposes. Instead, businesses claim capital allowances.

Let’s say the company claims 100% Annual Investment Allowance (AIA) in the first year, meaning the entire £1,800 is deducted from the taxable profit.

• Taxable profit = £5,000 – £1,800 = £3,200

Now apply the correct corporation tax rate:

If this company’s total annual profit is below £50,000, it qualifies for the small profits rate of 19%.

• Corporation Tax Payable = £3,200 × 19% = £608

But the accounting tax expense (based on £4,400) would be:

• Accounting Tax Expense = £4,400 × 19% = £836

Deferred Tax Liability:

This difference results in a temporary timing difference of £1,200 (£4,400 – £3,200), due to capital allowances exceeding depreciation in year 1.

The deferred tax liability would be:

• £1,200 × 19% = £228

This £228 is recorded as a deferred tax liability on the balance sheet, as it will reverse in future years when capital allowances decrease and depreciation continues.

Benefits of Deferred tax

Some of the major benefits of deferred taxes include the balancing of the accounts records. It provides a complete guide on the taxes how to calculate them and which adjustments are needed to take into account.

Secondly, the deferred taxes help reduce the profits and the company can avoid the overestimation of the profits.

Thirdly, the deferred allows the companies to defer the payments in future. So, the payment is lower in the first year, but the higher payments have to be made in the next years.

Conclusion

Finally, we can say that balancing the accounts is crucial for calculating the accurate profit and the corporate tax. For this, the deferred payments become quite challenging. However, if you take into account the deductions and allowances correctly, you can calculate the deferred taxes rightly.

After reading this blog, you must not get worried about what is deferred tax as we have given you a comprehensive guide on the deferred taxes with a precise example.

If you need help in balancing your accounts and in resolving your tax problems, CruseBurke can provide you with the services of expert tax advisors. Get in touch with us now!

Disclaimer: All the information provided in this article on What is Deferred Tax including all the text and the graphics is general in nature. It does not intend to disregard any of the professional advice.