10 March 2023
Corporate Tax Planning
As a business owner, you are likely aware of the upcoming rise in corporation tax from 19% to 25% as announced in the March 2021 Budget by former Chancellor Rishi Sunak. This increase, which is set to take effect from April 2023, will have significant implications for SMEs across the UK. It is unclear if the upcoming Spring budget will halt these changes however, it's crucial for businesses to plan ahead. The change in corporation tax rate means that businesses will need to review their financial strategies and make necessary adjustments to ensure they can continue to thrive in a more challenging environment.
At Haines Watts, we understand that this can be a daunting task for many business owners. That's why we've put together this guide to help you plan for the effects of the upcoming rise in corporation tax. In this article, we will cover everything from understanding the new tax rate to implementing strategies that can help minimise the impact of the CT rate changes on your business.
Understanding The New Corporation Tax Rate
Under the new rules, businesses with profits of less than £50,000 will continue to pay the current rate of 19%. For businesses with profits of more than £250,000, the new rate of 25% will apply. Profits between £50,000 - £250,000 will receive marginal relief. The government has introduced this increase as a way of recouping some of the costs associated with the COVID-19 pandemic and supporting public services. The limits are reduced by the number of associated companies.
It's important to note that the rise in corporation tax will impact businesses of all sizes, including SMEs. The increased tax rate will have implications for your business's cash flow, profitability, and ability to invest in growth. As such, it's important to take steps to plan and mitigate the effects of the change.
Assessing Your Business's Financial Position
Before you can create a plan to mitigate the effects of the rise in corporation tax, you need to understand your business's current financial position. This includes conducting a thorough review of your business's financial statements, including your balance sheet, profit and loss statement, and cash flow statement.
Once you have a clear understanding of your business's financial position, you can start to identify areas where you may need to make adjustments to prepare for the increase in corporation tax. This may include reviewing your pricing strategy, reducing costs, and exploring new revenue streams.
Another way to mitigate the effects of the increase in corporation tax is to reduce your costs. This may involve reviewing your supplier contracts to identify opportunities to negotiate better rates, exploring options to reduce your energy consumption, or streamlining your operations to reduce overheads.
When reviewing your costs, it's important to be strategic and identify areas where you can make savings without impacting the quality of your products or services. This can help ensure that your business remains competitive and profitable in the face of the increased tax rate
Utilise Tax Reliefs and Allowances
There are several tax reliefs and allowances that business owners can take advantage of to reduce their tax liability. For example, the Annual Investment Allowance (AIA) allows businesses to claim 100% tax relief on qualifying capital expenditure, up to a certain limit. Other tax reliefs, such as Research and Development (R&D) tax credits and Patent Box relief, can also help to reduce a company's tax liability.
Review Your Business Structure
Reviewing your business structure can help to reduce your tax liability. If you have multiple companies within your group, restructuring your business can help to optimize your tax position.
Find out more about Business Restructuring here >
Maximise Your Pension Contributions
Maximising your pension contributions can help to reduce your corporation tax liability. Pension contributions are tax-deductible, meaning that you can deduct them from your profits before calculating your Corporation tax liability. This can help reduce the Company’s tax bill and increase your retirement savings at the same time.
Consider Alternative Financing Options
If you are looking to invest in growth and expansion, consider alternative financing options, such as equity crowdfunding or peer-to-peer lending. These options can provide you with access to capital without incurring additional debt, which can help to preserve your cash flow.
Utilising loss relief
For company losses before April 2023, losses that are carried back will result in tax savings at a lower rate of 19%. Consider carrying forward the losses after 1st April 2023 to utilise the higher Corporation tax rate.
In conclusion, the upcoming rise in corporation tax can be a major concern for SME business owners. However, by effectively planning and managing your taxes, you can reduce the impact of the tax rise and continue to grow and succeed.