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 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 if the accounting period is less than 12 months

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 calculated by using the formula (U-A) x N/A x F where:

• U is the applicable upper threshold
• A is augmented profits
• N is total taxable profits, and
• F is a standard fraction of 3/200

Presuming A = N = £100,000 then the initial tax calculation at 25% gives a maximum tax charge of £25,000.

The marginal relief is (250,000 – 100,000) x 1 x 3/200 = £2,250, and the tax actually payable is £25,000 - £2,250 = £22,750.

Remember this assumes a full 12 months accounting period and no associated companies. If there was an associated company (therefore two in total) then U would be £125,000 and the marginal relief would be £375, leaving tax due at £24,625.

It’s worth noting that ‘augmented profits’ is your taxable profits plus any exempt dividends received from non-group companies.

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.

There are two key areas where we can help:

Firstly, we’ll help you establish the number of associated companies to be taken into consideration. Also, in due course, we’ll calculate the tax due after any marginal relief.

Secondly, we’ll talk through the options if you have associated companies with very different profit profiles. It’s worth considering merging some of them to reduce the overall tax charge.

Get in touch to talk through your tax planning.