Corporation tax changes in April 2023

Corporation tax rates have changed. You may have noticed recent budgets vacillating on whether or not to raise corporation tax, but now it’s settled – the rises are in place so here’s a reminder of what’s what.

Who pays and how much?

Companies recording profits in excess of £250,000 will now be subject to corporation tax at a flat rate of 25%. That’s a significant increase from the 19% payable in the previous tax year and it applies to all profits.

There’s no change for smaller companies that record profits of less than £50,000. Their corporation tax rate remains at a flat rate of 19%.

The slightly trickier category is those business that fall between these profit bands. If your profits fall within the range of £50,001 and £249,999, then there’s a form of staggered taxation.

Your company pays 25% on its profits, but it receives a reduction on the calculated liability. The reduction is calculated at a marginal rate multiplier of 3/200. In practice, the marginal rate relief works out to be 26.5% on your profits between £50,001 and £249,999. It’s not straight forward, so here’s an example:

Your annual profits are £95,000

1. Corporation tax at the main rate of 25% is £23,750
2. You then subtract your annual profits from the £250,000 threshold. The profits subject to the marginal rate reduction are £155,000.
3. Apply the marginal rate multiplier of 3/200 to £155,000. That gives you £2,325 of marginal rate relief.
4. Subtract the marginal rate relief (£2,325) from the main corporation tax liability (£23,750). The overall corporation tax liability is: £21,425.

On the previous rate of 19%, your company would pay £18,050. So, in real terms, the corporation tax increase has resulted in an additional liability of £3,375.

You can get an idea of your corporation tax liability with the government’s marginal rate relief calculator: https://www.tax.service.gov.uk/marginal-relief-calculator/.

A word of warning on Associated Companies

There are slightly different rules for associated companies. Two companies are ‘associated’ if one is under the control of the other, or if the same person(s) control both companies.
For a company with one associated company, the lower profit limit (normally £50,000) is reduced to £25,000. The upper profit limit (normally £250,000) is reduced to £125,000. The corporation tax is significantly more because the company pays corporation tax at 25% on profits over £125,000.
With that in mind, some companies may need to restructure to make the corporation tax bill more efficient. A limited liability partnership may be the answer for some associated companies.

Practical tips to navigate the increase

The tax increase imposes additional running costs on business. With that in mind, now might be a good time to assess whether you can reduce your other overheads and costs in your business model.
To account for the increase, you should update your internal software systems. Make sure that any regular payments into a savings pot for tax are updated so that you don’t face a shortfall at the end of the year.

Remember that corporation tax doesn’t exist in a vacuum. There are legitimate ways of reducing your corporation tax liability, for example with pension contributions or investment in qualifying plant and machinery. But what works for your business will depend upon your objectives, and your cashflow. We can help you devise a strategy to navigate the changes in a way that suits you and your business.

If you think you will be caught out by the new rules and would like to discuss ways to keep on top of, and minimise your tax liabilities, please get in touch.