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New Corporation Tax Rates from April this year

One question we get asked a lot is ‘Will the Corporation Tax Changes affect my tax bill?’

Well, from 1 April 2023, your corporation tax rate will be a changeable rate somewhere in the band from 19% to 25%.  The exact rate depends on the profits made by your business. This could mean a change to what you will owe in tax for the 2023/24 tax year.

So, what’s changed then?

First, a bit of background.  Before April 2022, everybody’s CT rate was a flat 19% (except for a special few in banking, oil & gas and insurance).  Successive administrations had taken the view that low Corporation Tax rates were a good way to encourage employment and grow the economy.  The fiscal hangover from COVID changed this narrative, and now the current administration sees increasing corporation tax rates as a way to raise tax revenue.

So, here’s what’s changing: from 1st April 2023 the new tax rates will be:

• The rate remains at 19% for companies with profits below £50,000;
• The rate increases to 25% for companies with profits above £250,000
• A tapered rate applies to profits between these two thresholds (more on this below)

It’s worth noting that if your profits are below £50,000 then nothing has changed!

A Caveat

The crafty among us might think, ‘Great, then I’ll just split all my profits across three of four companies to keep me below the £50k threshold’!  Well, the Treasury has thought of this and brought back the Associated Company rules.

These rules mean you have to divide the thresholds above by the ‘Associated Companies’ numbers.  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;
• Tax rates as above are then applied to the new thresholds

In broad terms, 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.

So, splitting profits across several different companies will achieve the same tax result as just using one company for everything.

How will this actually work in practice?

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%.

In between these two points, tax will be calculated at 25% less marginal relief.  Here’s where it gets tricky, so play along for a moment:

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

• U is the applicable upper threshold
• A is augmented profits (which include dividends from non group companies)
• N is total taxable profits, and
• F is a standard fraction of 3/200

If I have Profited of £100,000 then what is my Corp Tax Bill?

Presuming Taxable and Augmented Profits are £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.

So, if your profits are £100,000 you will pay £22,750 of Corp Tax.  This compares to the £19,000 previously.

Talk to us about planning for these Corporation Tax changes

Any change to your CT liabilities can have a significant effect on your financial position. It’s sensible to talk to book a meeting with us as soon as possible to work through your planning options.

There are two key areas where we can help:

1. Firstly, we’ll help you establish the number of associated companies to consider. Also, in due course, we’ll calculate the tax due after any marginal relief;
2. 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.

Contact us to discuss your tax planning around this area.

We’re a firm of Chartered Accountants and Chartered Tax Advisers in Welwyn Garden City, helping firms all around Hertfordshire and Surrounding Areas.