Did you know that the UK corporation tax rates are changed from April 2023?
From 1 April 2023, the rate of corporation tax changes from 19% to a variable rate between 19% to 25%, depending on the profits made by your business.This could mean a change to what you will owe in tax for the 2023/24 tax year, compared to what you might be expecting to pay.
What are the main changes to corporation tax?
Prior to the change, corporation tax (CT) is charged at 19% for most companies. The only exceptions are companies in specific sectors like banking, oil, gas and life insurance.
From 1st April 2023 the rate of tax changes:
The rate remains at 19% for companies with profits below a lower threshold
The rate increases to 25% for companies with profits above an upper threshold
A tapered rate for profits in between is introduced
The thresholds will work as follows:
The lower threshold is £50,000 divided by the number of companies that are deemed to be associated with each other
The upper threshold is £250,000 divided by the number of associates
Below the lower, £50,000 threshold, the tax rate is simply calculated at 19%. Above that, it’s calculated at 25%
But if the upper threshold is not breached, then marginal relief is applied, which has the effect of increasing the average rate from 19% up to 25%, as your profits increase
The bands are also reduced on a pro rata basis if the accounting period is less than 12 months
How will this actually work in practice? So, what does this mean for your CT bill? If you have no associated companies*, then where your profits are below £50,000, your tax will continue to be paid at 19%.
If your profits exceed £250,000, your tax rate will be 25% – meaning a significant jump in what you lose to tax. In between these two points, tax will be calculated at 25%, then marginal relief will be calculated by using the formula (U-A) x N/A x F where:
U is the applicable upper tax threshold
A is augmented profits
N is total taxable profits, and
F is a standard fraction of 3/200
Presuming A = N = £100,000 (i.e. the company hasn't received any exempt dividends), then the initial tax calculation at 25% gives a maximum tax charge of £25,000.
However, the marginal relief is (250,000 – 100,000) x 1 x 3/200 = £2,250, and therefore the tax actually payable is £25,000 - £2,250 = £22,750.
Remember this assumes a full 12 months accounting period and that there are no associated companies. If there was an associated company (therefore two in total) then U would be £125,000 (because the upper threshold is effectively halved) and the marginal relief would only be £375, leaving tax due at £24,625.
* In broad terms, a company is an associate of another company if one of the companies has control over the other. Alternatively if both are under the control of the same person or persons, then the two companies will be associated with each other. This includes non-UK resident companies but excludes dormant and some ‘passive’ entities.
** Augmented Profits are Taxable Total Profits plus exempt dividends received from non-group companies.
Talk to us about planning for these CT changes
Any change to your CT liabilities can have a significant effect on your financial position. It’s sensible to talk to your advisers as soon as possible to work through your planning options.
Where we can help:
We can help you establish the number of associated companies to be taken into consideration
We are also able to factor the tax changes into your corporation tax provision, so you are more prepared for the impact on your profits after tax
In due course, we’ll calculate the tax due after any marginal relief as part of your corporation tax calculation and also complete your corporation tax return with the relevant figures
Finally, if you have associated companies with very different profit profiles, it is worth considering merging some of them to reduce the overall tax charge. There are a number of steps involved, as a merger will have implications for accounting, a valuation may be required, there are usually tax issues to consider and other issues (e.g. TUPE if the companies involved in the merger have staff) and so it is very important to ensure that you plan ahead, before embarking on a merger.
Get in touch to talk to us if you would have any questions or if you are considering the impact of the new corporation tax rates and thresholds on your business.