How will changes to Corporation Tax from April 2023 affect my business?
Any business, large or small, has to pay Corporation Tax. From 1st April 2023 there are some changes which are going to make a difference to what a business has to pay. So, if you run a small business, how will the changes impact you?
As a reminder, you must pay Corporation Tax on profits from doing business if your company is:
- a limited company
- any foreign company with a UK branch or office
- a club, co-operative or other unincorporated association, eg a community group or sports club
Up until the end of the 2022 financial year – which runs from 1 April 2022 to 31 March 2023 – the rate of Corporation Tax was 19%. From 1 April 2023, changes to the rules mean the new rate companies pay will be dependent on the level of profit they make.
Two different rates are coming in
Companies whose profits are below £50,000 will continue to pay Corporation Tax at 19% – known as small profit rate – while those whose profits exceed the upper threshold of £250,000 will be taxed at 25%, known as main rate.
If your profit is below £50,000 then all of it is taxed at 19%, whereas if your profit is above £250,000 then all of it will be taxed at 25%. This is different to how personal tax is calculated. With Corporation Tax you can’t tax the first £50,000 profit at 19% and then the rest at 25%.
Companies whose profits fall between the upper and lower thresholds – that is anywhere between £50,000 and £249,999 – will pay Corporation Tax at the main rate of 25%. However, your company may be able to claim a reduction in the main rate due to something called Marginal Relief. HMRC says, “Marginal Relief provides a gradual increase in Corporation Tax rate between the small profits rate and the main rate – this allows you to reduce your rate from the 25% main rate.” In effect, Marginal Relief creates a gradual tapering of the Corporation Tax rate your company pays between the lower and upper threshold. This is known as the ‘effective tax rate’ which can be defined as ‘the average rate of tax payable by an organisation’.
How to calculate your company’s Marginal Relief rate
The Marginal Relief calculation can be complex, so it’s wise to give your accountant a call to talk this through. At Grant-Jones Accountancy we work in partnership with our clients to help them to understand how the rules work. In the meantime, a simple way to calculate your company’s effective Corporation Tax rate would be to calculate it in slices as follows:
Slice 1: £0 – £49,999 profit = 19%
Slice 2: £50,000 – £249,999 profit = 26.5%
Slice 3: £250,000+ profit = 25%
Take this example:
A company makes a profit of £100,000
£50,000 would be taxed at 19% = £9,500
£50,000 would be taxed at 26.5% = 13,250
This means the company would pay £22,750 which is an effective Corporation Tax rate of 22.75%. Remember, your accounting profit is not the same as your taxable profit and your accountant will make adjustments for depreciation, entertaining and capital allowances etc. to calculate this. When calculating your Corporation Tax, they will make other, different adjustments, e.g. to allow for a short accounting period or if your company has associated companies.
What constitutes an associated company and why does it matter?
Here’s the HMRC definition: “A company is an associated company of another company if one has control of the other, or both are under the control of the same person or persons.” For example, if you own 100% of shares in Company A and 100% of the shares in Company B, then those two companies are under common control and are therefore associated companies – even if they are entirely different types of businesses. Where companies are associated, then they must share the profit limits for the purposes of Corporation Tax.
Control of a company means ownership of greater than 51%. When considering the degree of control, spouses, civil partners and business partners are also taken into account. HMRC has useful information on exactly what control means, if you are uncertain in your company’s case.
Where there is one associated company, then the profit limits must be divided by two. So when companies A and B are associated they will pay Corporation Tax at 25% on all their profits if their combined profit is over £125,000 and 19% if their combined profit is below £25,000. If there are more than two associated companies, then the profit limits will be adjusted accordingly.
What if your accounting period spans two financial years?
If your accounting period doesn’t fall on 1 April 2023, you may be wondering how your Corporation Tax will be calculated. Your accountant will apportion the profits according to the number of months falling before 1 April 2023 and tax those at 19%. Profits falling on or after 1 April 2023 will be taxed according to the new rules with the upper and lower profit limits also being proportionally reduced.
For example, if a company has a year end of 30 September 2023, then six months will be subject to the old calculation method and six months to the new one. If the company made a profit of £400,000 for the full 12-month accounting period then the tax would be calculated as follows:
For the first six months from 1 October 2022 to 31 March 2023
- (6÷12 x £400,000) x 19% = £38,000
For the second six months from 1 April 2023 to 30 September 2023
- The lower profits threshold will be (6÷12 x £50,000) = £25,000
- The upper profits threshold will be (6÷12 x £250,000) = £125,000
- (6÷12 x £400,000) = £200,000
As this is above the adjusted upper profits threshold of £125,000, this must be taxed at 25% = £50,000
The total Corporation Tax due for the accounting period would therefore be £88,000.
As you can see, it’s a complex area so take advantage of our straightforward, honest advice and together we’ll make sure your company is on the right track for continued success. If you would like help with producing your accounts and Corporation Tax returns, please contact us today.
