Corporation tax is a huge source of revenue for the Government. Collected by the Government from the profits of companies operating in the UK and it is changing. (The profits of unincorporated businesses, sole traders and partnerships are subject to income tax as opposed to corporation tax).
UK limited companies currently pay corporation tax at 19% on their annual profits, but this will be increasing from 1st April 2023.
Corporation Tax is Changing from 1st April 2023
COVID-19 assistance has seen UK debt soaring above £2.2 trillion, which is roughly 99.7% of GDP. This rate not been seen since the early 1960’s, hence the chancellor is under pressure to claw back the COVID-19 deficit.
This has started with changes to the corporation tax regime. The Treasury intends to resurrect a corporation tax regime abolished in 2015. The 2023 version will feature differences in relation to the marginal rates.
Who Will Pay The 25% Rate of Corporation Tax?
If a company has annual augmented profits of more than £250,000 from 1st April 2023, it will have to pay the main rate of corporation tax at 25%.
If you aren’t familiar with Corporation Tax you may not have heard the term Augmented Profits before. Augmented Profits are Taxable Total Profits of the period, plus exempt dividends or franked investment income. (Franked investment income can be defined as dividends received from non-group companies) – these are included when establishing augmented profits, so group dividends are ignored. In practice, most types of non-group dividends will be included when calculating augmented profits.
Augmented profits are therefore essentially made up of:
| Taxable Total Profits (TTP) | X |
| Dividends received (from non-group companies) | X |
| Augmented profits | X |
Note that while it is the augmented profits figure which is compared with the profit limits to determine the rate of tax applicable to the company, it is the taxable total profits (TTP) which is subject to corporation tax.
Small-Profits Threshold – Corporation Tax
The current main rate of corporation tax of 19% will continue in the form of the small-profits rate, which will apply to companies with profits of up to £50,000 from April 2023.
Certain types of company cannot claim the small-profits’ rate or marginal relief, including:
All close companies are close investment-holding companies unless they exist mainly for one of the permitted purposes. Basic Permitted purposes are: to be a trading company, or a member of a trading group, or to make investments in land.
Corporation Tax Rate Taper
Companies with profits between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief.
In computing the corporation tax liability, TTP is initially taxed at the main rate where profits are between the lower and the upper limits. Marginal relief is then deducted.
Marginal relief is given by the formula:
Fraction x (Upper Limit – Augmented Profits) x Taxable Total Profits/Augmented Profits
For the period beginning 1st April 2023 the marginal relief fraction is 3/200.
So, for a company that has profits of £100,000 for the period ended 31st March 2024, the corporation tax calculation would be as below:
| £ | |
| £100,000 @ 25% | 25,000 |
| Less Marginal Relief: 3/200 x (£250,000 – £100,000) x £100,000/£100,000 | (2,250) |
| Corporation Tax Due | 22,750 |
Financial Year Straddle
Although the rate of corporation tax is fixed by reference to financial years, assessments are made by reference to accounting periods. Where an accounting period does not fall entirely within one financial year, it may be necessary to apportion the profits of an accounting period on a time basis to the financial years in which the period falls.
For example, for accounting periods which straddle the rate change which comes into force on 1 April 2023, two separate calculations will need to be performed in order to calculate the correct liability. The company will be deemed to have two separate accounting periods as follows:
If an accounting period straddles financial years where the corporation tax rates are the same in both financial years, no time apportionment of TTP is required.
So, for a company that has profits of £150,000 for the period ended 30th November 2023, the corporation tax calculation would be as below:
| £ | |
| £150,000 x (121/365) @ 19% | 9,447.94 |
| £150,000 x (244/365) @ 25% | 25,068.49 |
| Less Marginal Relief: | |
| 3/200 x (167,123.30 – (150,000 x 244/365)) | (1,002.74) |
| Corporation Tax Due | 33,513.70 |
Simpler Formula
There is however a simpler formula that can be used on a slab basis, if the accounting period does not straddle a period in which the old rules and new rules apply, as per the table below:
| Profit Band | Marginal Rate |
| £0 to £50,000 | 19% |
| £50,000 to £249,000 | 26.5% |
| £250,000 plus | 25% |
So, for example a company with the year ended 31st March 2024 with profits of £100,000 the corporation tax would be calculated as below:
| £ | |
| £50,000 @ 19% | 9,500 |
| £50,000 @ 26.5% | 13,250 |
| Corporation Tax Due | 22,750 |
Group Companies – Watch Out
The lower and upper limits will be proportionately reduced for short accounting periods and where there are associated companies. A company is associated with another company at a particular time if, at that time or at any other time within the preceding 12 months:
Where companies are Associated the £50,000 and £250,000 thresholds are strictly apportioned, if two connected companies, then each has a £25,000 Small Profit Rate threshold.
The strict apportionment can cause an anomaly if profits are not equal:
Companies A and B are under common control. A makes an annual profit of £22,000 and B £28,000. Both will pay Corporation Tax at Small Profits Rate, 19%, so £4,180 and £5,320 respectively, total £9,500.
Companies A and B are under common control. A makes an annual profit of £48,000 and B £2,000. Company A will only have a £25,000 Small Profits threshold, so will pay Corporation Tax at an Effective Rate of 22.59%. The Corporation Tax bills will be £10,845 and £380 respectively, total £11,225. This is £1,725 more than the preceding example despite profits being the same.
Super-Deduction – Reduce Your Corporation Tax Bills
Our super-deduction blog has proved very popular. Until 31st March 2023, a company can reduce its corporation tax bills by investing in qualifying plant and machinery assets.
If your company invests in qualifiying plant or machinery, you will benefit from a 130% first-year capital allowance – this will effectively cut your company tax bill by up to 25p for every £1 you invest.
For example, if a company invests £10m in qualifying assets in 2021/22, it could deduct £13m, saving £2.47m in corporate tax. Without the super-deduction, the saving would be £497,800.
Limited companies will also benefit from a 50% first-year allowance for investing in qualifying special-rate assets, including long-life ones.
Don’t forget, we can help to ensure that your accounts are accurate and fully compliant. We can also suggest strategies to minimise your tax liability and maximise your profitability.
HB Accountants are here to help: giving you access to experienced accountants and useful information and support no matter your business size or sector. If you would like a no obligation discussion about how we can help you and your business, please feel free to contact the team on 01992 444466. We’re accountants for business and we’re here to help you grow.
