Changes to Corporation Tax announced in the March Budget were described by the Government as a “fair way to deliver more sustainable public finances” while protecting the UK’s competitive position.
From April 2023 the Corporation Tax rate for the most profitable companies – those earning £250,000 or more – will rise from 19 per cent to 25 per cent.
Companies with smaller profits of up to £50,000 will continue to be taxed at 19 per cent thanks to the small profits rate, and there will be marginal relief offered between 19 per cent to 25 per cent for the businesses that fall between the lower and upper profit thresholds.
While 2023 may seem some time away, companies and their accountants need to prepare for these changes as soon as they can.
With a huge budget deficit amid the Coronavirus pandemic, the Government is having to perform a careful balancing act, providing support and incentives to encourage economic recovery and growth while seeking to bolster public finances.
Corporation Tax from 2023
The rate of Corporation Tax will remain at 19 per cent for the financial year 2022 that begins on 1 April 2022 before the new rules come into play. As mentioned, a small profits rate of 19 per cent will then apply from 1 April 2023, to companies with taxable profits of £50,000 or less, with all businesses above this threshold paying the new higher Corporation Tax rate.
This limit is reduced if the company has associated companies or if the accounting period is less than 12 months.
Marginal relief reducing the effective rate of tax will then be available to companies whose taxable profits fall between £50,000 and £250,000 and pay corporation tax at the main rate of 25 per cent.
This will provide a bridge between the small profits rate of 19 per cent, applying to companies with profits of £50,000 or less, and the main rate of 25 per cent, applying to companies with profits of £250,000 or more.
The effective rate of Corporation Tax between these two limits will increase gradually depending on a company’s profits.
The limits are reduced to reflect the number of associated companies that a company has, for example, being divided by two where a company has one associated company. Like the small profits rate, the limits are also proportionately reduced where the accounting period is less than 12 months.
The marginal relief fraction is set at 3/200. The amount of marginal relief is found by multiplying the fraction by the difference between the company’s profits and the upper profits limit of £250,000.
For example, if a company has taxable profits of £100,000, they would be entitled to marginal relief of £2,250 (3/200 x (£250,000 – £100,000)). This means that in this example, marginal relief gives an effective rate of Corporation Tax of 22.75 per cent.
The new Corporation Tax rules are complex and require careful calculations based on various criteria.
Given that the rate of tax a business pays will be based on their profits, there may be new opportunities to minimise liabilities through careful tax planning, but it is important that strategies are put in place well in advance of the new rates being launched.
For help and advice with corporation tax matters, please get in touch with our expert team today.