Changes to Corporation Tax
The Chancellor signalled a significant change to Corporation Tax rates, which is due to take effect next year. But what difference will it actually make to your liabilities? JOSH RUTHVEN from our accounts department explains.
Corporation Tax is currently set at 19% for all businesses, but in the 2021 Budget, it was announced – for the year beginning 1 April 2023 – there was going to be a significant change to the rates. So how will this affect your business?
The Chancellor Rishi Sunak had to try and achieve a major clawback in revenue after the devastating financial impact of the coronavirus pandemic. One of the main policy changes was to increase the rate of Corporation Tax, as it was the lowest in the G7.
What are the changes?
Firstly, for profits of more than £250,000, the Corporation Tax rate will increase to 25%. A small-profits rate will also be introduced for companies with profits of £50,000 or less. This means these companies will continue to pay Corporation Tax at 19%. Companies with profits which fall between the two thresholds will pay tax at a main rate reduced by a marginal relief, providing a gradual increase in the effective Corporation Tax rate.
The marginal relief calculation is devised using a fixed percentage for the accounting year from HM Revenue & Customs. From 1 April 2023 the percentage is 3/200ths. This is then multiplied by the total of the upper limit threshold minus the current year's chargeable profits. Once the relief is calculated, this will then be deducted against the tax at the main rate, which is shown in the example below.
Example calculation:
Taxable profits - £150,000
Tax at the main rate - £150,000 x 25% = £37,500.
Marginal relief – 3/200 x (£250,000-£150,000) = £1,500
Total tax to pay - £37,500 - £1,500 = £36,000
Effective rate of tax - £36,000/£150,000 = 24%
What if your accounting period does not start on 1 April 2023?
Where the accounting period spans 1 April 2023, the profits are apportioned to those falling within the financial year 2022, which are taxed at 19%, and those falling within the 2023 financial year. The profits falling in the 2023 financial year will be taxed at the appropriate rate, depending on the level of profits falling into that year. Additionally, the upper and lower profit limits will be proportionately reduced.
For example, if a company had a year end of 30 September 2023, and the company has profits of £250,000, the profits which fall into the 2022 year will be £125,000 (£250,000 x 6/12) and the resulting Corporation Tax at 19% will be £23,750.
The upper and lower profit limits will be reduced as only six months relates to the 2023 financial year. Therefore, the lower profits limit will be £25,000 (£50,000 x 6/12) and the upper profits limit will be £125,000 (£250,000 x 6/12). As these are equal to the upper profits limit, they will be taxed fully at 25%.
Overall, the company will have a Corporation Tax Liability of £47,500.
The rises in the Corporation Tax rates will cause increased liabilities, so companies will need to plan and budget more ahead for the years in which the new rates come in.
If you have any queries or want to discuss the tax situation of your own business, why not call us at Page Kirk on 0115 955 5500 or email enquirie@pagekirk.co.uk?