What is happening to the UK Corporation Tax rate in 2023?

What is happening to the UK Corporation Tax rate in 2023?

Corporation Tax changes are looming in April 2023, meaning the Government have placed another tax increase on many businesses.

Corporation Tax is scheduled to increase from 1 April 2023. For companies with profits of less than £50,000, the rate remains at 19%. For businesses whose taxable profits exceed £250,000, the rate will increase to 25%. For companies in between there will be a sliding scale of rates.

Companies with taxable profits between £50,000 and £250,000 will pay tax at the 25% rate, but this will be reduced by a marginal relief meaning CT rates of between 19% and 25%.

In this blog, we explain the complexities of the new Corporation Tax regime and how to work out the rate you will pay.

What are the new Corporation Tax rates?

The main rate of Corporation Tax will rise from 19% to 25% in April 2023 for many companies. For smaller companies, the rate they pay will depend on your profits for each fiscal tax year, and many will not have to pay corporation tax at the full rate of 25%.

If your annual profits are at or below the £50,000 threshold, the current 19% rate will still apply.

The full 25% rate only applies to companies with annual profits of £250,000 or more.

However, profits between £50,000 and £250,000 will have an effective tax rate of 26.5%.

Please note that new ‘Associated Companies’ rules also come into effect in April 2023.

This means that if two or more companies are ‘related’ in some way (usually by common ownership), then the new £50,000 and £250,000 thresholds are reduced according to the number of associated companies involved.

This makes the Corporation Tax system much more complicated than the previous because of the introduction of marginal relief that will apply. This provides a gradual increase in the effective Corporation Tax rate.

How will the increase in April 2023 affect businesses?

The changes will affect businesses in different ways, depending on their size.

• For companies generating £50,000 or less of annual profits, the current 19% rate will still apply in 2023. So, no change from the current rate.

• If a company generates £250,000 or more the full 25% rate will apply. This will make a huge difference to profits for those companies above the £250k threshold.

• For those companies falling between the lower and upper limits, more work will need to be done to calculate their marginal relief and tax liability to understand what they will pay from 2023 onwards.

What type of companies will this affect the most?

A significant number of companies with £50k and above annual profits will pay more tax under the new regime, even if this amounts to just a few hundred pounds per year.

According to the Government, 70% of companies will not pay more than 19% during the 2023/4 tax year. However, 30% of UK companies will pay more under the new rates, with 10% of businesses paying the full 25%.

How can I minimise my Corporation Tax bill?

Depending on your circumstances, there are things you could do prior to April 2023 to minimise your Corporation Tax liability.

This may include:

• Delaying any large salary/bonus/pension payments into a later period which will enable corporation tax saving at the higher rate of 25%.

• Considering the timing of company profits, if your year-end falls near 31 March 2023.

• Making capital asset disposals and triggering the gain by exchanging contracts before 1 April 2023 to tax the gain at 19%.

• Shortening the year-end to 31 March 2023 if your company accounting period straddles 1 April 2023 and you have significant profits in the early months of the accounting period.

• Carrying forward losses to use against future profits if you are a loss-making company.

   

What is marginal relief, and who can claim it?

Marginal Relief provides a gradual increase in Corporation Tax between the small profits rate (19%) and the main rate (25%) — this allows some companies to reduce their rate from the 25% main rate.

Your company may be able to claim Marginal Relief if its taxable profits from 1 April 2023 are between:

• £50,000 (the lower limit)

• £250,000 (the upper limit)

If your accounting period is shorter than 12 months, these limits are proportionately reduced. Companies whose accounting periods end soon after April 2023 will pay a pro-rated rate of Corporation Tax on a just and reasonable basis.

Who cannot claim Marginal Relief?

You cannot claim Marginal Relief if:

• you’re a non-UK resident company

• you’re a close investment holding company

• your profits (including distributions from unrelated, unassociated companies) go over £250,000

Working out your Corporation Tax rate and marginal relief

The easiest way to calculate your Corporation Tax, is to speak to your accountant or use the Government's Marginal Relief Calculator.

Associated companies

The upper and lower limits for taxable profits are reduced depending on the number of ‘associated companies’, the taxable profit limits being divided equally among all the associated companies.

For example, if your company has 3 other associated companies, the limits are divided by 4. The lower limit becomes £12,500, and the upper limit becomes £62,500.

Associated companies can be located anywhere, provided they meet the ‘51% group company’ test.  Dormant companies are exempt from this rule, and holding companies may become exempt depending on the circumstances.

We recommend that you get a review of the associated company position, post 1 April 2023, from an accountant such as Haines Watts.

Corporation Tax on chargeable gains

When selling or disposing of a business asset, you may need to pay Corporation tax on any profits (or 'chargeable gains') that you make.

If companies are looking to dispose of chargeable assets, they should consider bringing forward the date of the disposals to before 1 April 2023 to benefit from the lower rate.

Plan ahead for the increase with Haines Watts

Now is the time to plan ahead, and our tax experts can advise you on ways in which you can minimise your Corporation Tax bill by considering things like timing of profits, making capital asset disposals, changing your year-end or delaying payments.

Contact us at our offices in Wirral, Liverpool or Chester if you need more help or advice on the April 2023 Corporation Tax rise.