The biggest change to affect the UK corporation tax system has come into force from 1 April 2023. Do you know how the changes will affect you and your business? Have you made appropriate plans to mitigate the potential losses? Here I will explain how corporation tax works, and what you can do to mitigate your losses under the new regime.
What is corporation tax?
Corporation tax is the name given to the tax that is imposed on limited company profits. Limited company profits are calculated by removing all tax deductible expenses from company income. What’s left is referred to as your “profits”, and that is what corporation tax is charged on.
What is the rate of corporation tax?
The main rate of corporation tax in the UK has been 19% since 1st April 2017. However, with effect from 1st April 2023 the UK has moved to a marginal relief system whereby companies will pay a rate of anywhere between 19% and 25% dependent upon their profit levels.
What is a marginal relief system for corporation tax?
A marginal relief system for corporation tax means that the rate at which companies pay tax will be determined by what margin their profits fall into. Companies with profits up to the lower limit (currently £50k) will continue to pay corporation tax at 19% whereas companies with profits in excess of the upper limit (currently £250k) will pay corporation tax at 25%. Companies with profits that fall between the two limits will pay a marginal rate of corporation tax dependent upon where in the margin they fall.
How do I know what rate of corporation tax I pay if I fall into the marginal band?
If you fall into the marginal rate band then your profits will charged entirely at 25%, and then you will get “marginal relief” which is calculated using your profit levels and the marginal relief fraction, which is 3/200. There is however an easy way to do this calculation yourself, and that is to calculate 19% on the first £50k of your profits, and then 26.5% on the remainder of your profits. This will give you the corporation tax liability, which you can then divide by your profits to give you the percentage rate. Here is an example:
Example : £70k profits with no associated companies
|£50,000 @ 19%||£9,500|
|£20,000 @ 26.5%||£5,300|
|Corporation tax to pay||£14,800|
|Overall corporation tax rate||21%|
How many associated companies do I have and why is it important?
The concept of associated companies are now more important than ever, since the lower and upper limits for corporation tax purposes are divided by the number of associated companies you have. This subject is rather large and would take up a whole article in itself, but the basic concept is that any company that is “under common control by the same person or same group of people” is an associated company. The only exception to this is dormant companies.
What happens if my company year end isn’t 31st March 2023?
If your company year end doesn’t fall in line with when the tax rules change then your company profits will be evenly apportioned across the year, with the period that falls before 31st March 2023 being taxed under the old 19% rule, and the period that falls after 1st Apr 2023 being taxed under the marginal relief system.
What can I do to mitigate my corporation tax increase?
If you are looking to mitigate your losses under the new corporation tax regime then you will need to speak to your accountant to assess the situation specific to your circumstances, but as a general guidance, if you are looking to move from the marginal relief band back below the lower limit you have a few options available to you:
- Increase salaries – this will allow you instant access to money from your company, but will also mean that you need to pay the employment taxes on it in-year.
- Make contributions to your pension scheme – this will get money out of the business without an immediate tax burden, but does mean that you won’t have instant access to it.
- Invest in new company assets – if you are looking to reduce your company profits that are liable to corporation tax then spend company money investing in assets that are eligible for AIA.
As always, if you are in need of advice specific to your company then please don’t hesitate to get in touch with us on [email protected] or 01634 540340.