Corporation Tax Rise – How Will You Be Affected?

Chartered Accountant Tom Johnson looks at how corporation tax is changing and the way it will affect different sizes of business in different ways.

In one of the most notable changes to corporation tax legislation over the last few years, the tax rate has increased from 19% to 25% for larger companies from 1 April 2023.

The UK government proposed they would gradually increase corporation tax rates during a 2021 Budget as a way for the government to pay for the relief handed out during the COVID-19 recovery plans. Here are the key details you need to know:

• The rate will remain at 19% for companies with profits less than £50,000.
• Companies with profits between £50,000 and £250,000 will have a tapered rate (more on this later) which essentially means they will pay less than 25%, but more than 19%, depending on the level of profits.
• Companies with profits above £250,000 will pay the full 25% rate.

If a company has more than one rate that applies to their accounting period (eg. financial year end of 31 December 2023), the corporation tax rate will be time-apportioned based on the number of days. In this case, a quarter of profits will be charged at 19% and the remaining profits will be charged at 25%. However, the upper limit at which you pay corporation tax at the full 25% rate will also be adjusted correspondingly.

There are another couple of scenarios where your upper limit may be adjusted, which are:

• If your accounting period is shorter than 12 months, the limits are proportionately reduced.
• If you have associated companies, you need to add 1 the total number of associated companies your company has and divide £250,000 by that number to give your profit threshold.

As around only 10% of UK companies will be taxed at the full 25% rate, you will need to know how to calculate your tapered rate and how marginal relief is likely to affect your company. Marginal relief is a deduction from your profits when they are taxed at 25%, but is only applicable when your profits exceed £50,000 but are lower than £250,000.

For example, for a company year end of 31 March 2024, with profits of £100,000, the marginal relief would be £2,250. This is calculated by subtracting the upper limit (£250,000) by the taxable profit (£100,000) and multiplying that by the fraction of 3/200. £150,000 x 3/200 = £1,500. You then subtract this number from your profits, if they were taxed at 25%, to give your final tax liability. £25,000 (25% x £100,000) - £2,250 = £22,750. From this you can work out your tapered rate of corporation tax, which in this case is 22.75% (22,750/100,000).

Don't forgot you should always try to minimise your corporation tax liability by including all applicable reliefs and deductions, such as capital allowances, research and development tax reliefs and loss relief.

Understanding how this tax works and the 25% threshold is crucial to managing your business finances effectively.

To find out more about how Page Kirk can help you with your corporation tax liability, email enquiries@pagekirk.co.uk or call 0115 955 5500.