Corporation Tax rate changes from April 2023

Introduction

From 01 April 2023 the rate of Corporation Tax has increased for businesses who have profits of more than £50,000 per year. This change should not affect businesses who have profits of £50,000 or less per year unless the business has other associated companies.

What's changed

Most small businesses that trade as a limited company are used to paying Corporation Tax at 19% of their annual profits. This rate of Corporation Tax is called the main rate.

The Government have now increased the main rate of Corporation Tax to 25%.

The Government have also introduced a new rate of Corporation Tax called the small profits rate which is (confusingly) set to 19%.

Businesses with profits of £50,000 or less will be taxed at the new small profits rate of 19% so won't be impacted by the recent changes.

Businesses with profits of £250,000 or more will be taxed at the increased main rate of 25%, resulting in a tax bill at least £15,000 higher than before.

Businesses with profits between £50,000 and £250,000 will be taxed at the marginal rate.

The marginal rate

Much of the focus around the recent changes has been on the 19% to 25% increase that applies to businesses that have profits of more than £250,000 per year. But what happens if profits fall between the £50,000 and £250,000 thresholds?

The answer is that the first £50,000 of profits are still taxed at 19%, but any profits between £50,000 and £250,000 are taxed at a higher marginal rate of 26.5%.

You read that right, profits between £50,000 and £250,000 are taxed at a higher rate than the increased 25% main rate.

The reason for the higher marginal rate is so that when you run the numbers, the overall effective tax rate on all profits falls somewhere between 19% and 25%. Check out the examples below:

Example 1: £125,000 in profits

Looking at the above example we can see that because the profits fall between £50,000 to £250,000, the overall effective tax rate also falls between the small profits rate of 19% and the main rate of 25%.

Example 2: £250,000 in profits

Looking at example 2 above we can see that once profits reach the £250,000 threshold, the overall effective tax rate is now equivalent to the main rate of 25%.

Associated companies

In addition to the changes discussed above the Government have introduced rules around associated companies.

For a business that is deemed "associated" to another company the £50,000 and £250,000 thresholds are reduced. The thresholds are divided by the total number of associated companies.

Example 3: Threshold for a business with an associated company

The definition of associated companies is quite broad but the following would be considered associated:

• Trading companies within a group (under a holding company)
• Companies owned or controlled by the same person

Careful planning will need to be taken to ensure associated companies are identified and steps put in place to mitigate the impact.

What can I do?

If you're concerned about these changes and you're a TaxBoxx client, please message your accountant who will be more than happy to discuss these changes with you and explore your options. If you're not a TaxBoxx client you can use our free "Ask an accountant" service by pressing the button at the bottom of this article.