New corporation tax rate from April 2023

How are UK corporation tax rates set to change?

From 1 April 2023, the rate of corporation tax changes from 19%, to introduce a ‘small profits rate’ of 19%, a ‘main rate’ of 25% and reintroduces ‘marginal relief’ for those where profits fall between £50,000 and £250,000, to ensure these companies will pay an overall effective corporation tax rate of between 19% and 25%. This could mean a change to what you will owe in tax for the 2023/24 tax year.

What are the main changes to corporation tax?

Prior to the change, corporation tax is charged at 19% for most companies. The only exceptions are companies in specific sectors like banking, oil, gas and life insurance.

However, 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 hybrid rate applies where profits fall between these thresholds.

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 is calculated at 25%.
• But where the lower threshold is breached, but the upper threshold is not, then marginal relief is applied, which has the effect of increasing the average rate from 19% up to 25%, as your profits increase.
• Broadly speaking, companies will be associated with one another if at any time during the accounting period, one has control of the other, or both are under the control of the same person(s), subject to substantial commercial interdependence tests and with the exception of dormant companies and passive holding companies.

How will this work in practice?

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 3/200 = £2,250, and the tax actually payable is £25,000 – £2,250 = £22,750 (an effective rate of 22.75%).

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 (an effective rate of 24.63%).

It is worth noting that ‘augmented profits’ are the company’s total taxable profits plus any exempt distributions from non-group companies (e.g dividends, distributions of assets, etc) and where the accounting period is less than twelve months, the upper and lower limits are reduced proportionately.

Any change to your corporation tax liabilities can have a significant effect on your financial position and it is important to talk through your planning options. Get in touch with our Senior Tax Manager, Vanessa Glenn.

Email: [email protected]

Phone: 02476 306029