Changes are on the way next month to the rate of corporation tax you will be paying and it is important to be prepared.
If you operate your business through a limited company you will pay corporation tax on your profits and that rate is the same regardless of the level of your profits.
For the current financial year, that runs until the end of this month, the rate of corporation tax is set at 19 per cent. However, this is due to change from 1 April.
The changes may affect how much corporation tax you pay and how you calculate your corporation tax liability. It is important to understand what the changes may mean for your business.
Corporation tax from April 2023
From 1 April 2023:
- The main corporation tax rate is increased to 25 per cent where profits are over the upper profits limit, set at £250,000.
- A small profits rate will apply for companies whose profits are equal or below the lower profits limit, set at £50,000. The small profits rate is set at 19 per cent.
- Companies with profits between the lower and upper limits (£50,000 and £250,000) will pay tax at the main rate of 25 per cent, but this will be reduced by marginal relief. The effect of marginal relief is that the effective rate of corporation tax gradually increases from 19 per cent where profits are £50,000 or less to 25% where profits are more than £250,000.
The limits are reduced if you have associated companies or if your accounting period is less than 12 months.
A company will be ‘associated’ with another business if either has control of the other or they are both under the control of the same person. This control can include voting power; share capital; income of the company; or company assets. Full details of the definition of control can be found on gov.uk.
Impact if profits are £50,000 or less
If your company is a standalone company without associates and your taxable profits are £50,000 or less, you will be unaffected by the changes to corporation tax that come into effect from April. You will continue to pay corporation tax on your profits at 19 per cent.
Marginal relief – profits between £50,000 and £250,000
If your company profits are between £50,000 and £250,000, you will pay more corporation tax than was the case in the financial year ending 31 March 2023.
The amount of tax you pay will be found by multiplying your profits by the main rate of 25 per cent and deducting marginal relief.
Marginal relief is calculated in accordance with the following formula:
F X (U – A) x N/A
- F is the standard marginal relief fraction
- U is the upper limit
- A is the amount of augmented profits
- N is the amount of the taxable profits
For the financial year 2023, the marginal relief fraction is 3/200.
This formula is not included to confuse you, but to illustrate that a new complication has been added to the determination of company tax liabilities.
The upper limit is £250,000. However, this is reduced if your company has associated companies or if your accounting period is less than 12 months.
Augmented profits are total taxable profits plus qualifying exempt distributions that are received from companies that are not 51 per cent subsidiaries or owned through a consortium.
For example, if you have total taxable profits of £100,000 for the year to 31 March 2023, and did not receive any qualifying exempt distributions (so augmented profits are also £100,000), you will be entitled to marginal relief of: 3/200 (£250,000 – £100,000) x £100,000/£100,000 = £2,250.
Therefore, your corporation tax bill will be £22,750 ((£100,000 @ 25%) – £2,250). This is an effective rate of 22.75 per cent.
Likewise, if your taxable profits are £200,000, you will be entitled to marginal relief of £750 and will pay corporation tax of £49,250 ((£200,000 @ 25%) – £750). This is an effective rate of 24.625 per cent.
In this way the marginal relief smooths the transition from 19 per cent to 25 per cent.
Profits in excess of £250,000
If profits from your standalone company are more than £250,000, the rate at which you pay corporation tax will increase by six per cent, from 19 per cent to 25 per cent from 1 April.
You will need to plan ahead for the impact of this increase, which will adversely affect your cashflow and will reduce your retained profits. A reduction in retained profits will mean there are less funds to distribute as dividends.
For every £10,000 of profits, you will pay an additional £600 in corporation tax from 1 April.
Impact of associated companies
The lower (£50,000) and upper (£250,000) profit limits are reduced if you have associated companies. The limit is divided by the number of associated companies plus one. For example, if you have one associated company, the lower limit is £25,000 and the upper limit is £125,000 – the limits are divided by two. Likewise, if you have four associated companies, the limits are £10,000 and £50,000 – the limits are divided by five.
Where you have associated companies, the reduction in the limits will affect the profits which are charged at the small companies’ rate, the band to which marginal relief applies and point at which corporation tax is payable at the main rate.
For example, if you have one associated company so that the limits are halved, from 1 April 2023, you will pay corporation tax at the small profits rate if your profits are £25,000 or less. If your profits fall between £25,000 and £125,000 you will pay tax at 25 per cent, as reduced by marginal relief. If your profits are more than £125,000, you will pay corporation tax at the main rate of 25 per cent.
The following table shows the lower and upper profit limits if you have no associated companies, or between 1 and 4 associated companies.
|Number of associates||Lower profits limit||Upper profits limit|
You may want to review your company structures prior to 6 April. For example, if you have one company with taxable profits of £40,000 and one company with taxable profits of £5,000, the company with the taxable profits of £40,000 will not benefit from the small profits rate as the profits are above the lower limit of £25,000 that applies to a company with one associate.
Merging the companies will mean that there is only one company and the combined profits of £45,000 will be charged at the small profits rate of 19 per cent.
Short accounting periods
The lower and upper profit limits are also proportionately reduced if your accounting period is less than 12 months. For example, if you change your accounting date and prepare accounts for nine months when moving to the new date, the limits are £37,500 and £187,500.
We can help
If your company is likely to have profits in excess of £50,000 or has one or more associated companies, we will need to revisit options to minimise your corporation tax bills from 1 April 2023.