If you run a limited company in the UK, you’ll need to pay corporation tax on the profits.
Corporation tax changed earlier this year, with the main rate moving up from 19% to 25%, and decreasing incrementally for businesses with profits less than £250,000.
Let’s delve into what the latest changes could mean for your business.
What are the latest changes in 2023?
Beginning 1 April 2023, the Government rolled out a series of structural adjustments to the corporation tax rate.
Firstly, the main rate of corporation tax rose from 19% to 25%. However, only large companies with profits over £250,000 in a financial year will need to pay the full 25% rate.
Recognising the different scales of business operations, the Government also introduced a 19% “small profits rate” for companies with profits of £50,000 or less. This means that many smaller businesses will be largely unaffected by the main rate change.
Finally, businesses with profits between the two thresholds (£50,000 and £250,000) will be taxed at the 25% main rate, but tapered down proportionately using marginal relief.
Essentially, these new rules introduce a graded approach to corporation tax.
Understanding the tax implications
Now these changes are in place, businesses should be proactive and consider their projected profits for the upcoming financial years.
If your company’s profits are expected to surpass £250,000, start planning for the 25% corporation tax rate. This might be the time to reconsider investments, expansions, or other financial decisions to ensure tax efficiency.
If your profits hover at or below £50,000, you remain in the safe zone with the 19% rate. However, it’s always wise to monitor growth trajectories and anticipate if and when you might cross into the intermediate bracket.
If you’re in the middle
Companies anticipating profits between £50,000 and £250,000 need to be vigilant. The introduction of marginal relief means your effective tax rate will be between 19% and 25%, depending on where your profits lie.
Effective Tax Rates Across Various Profit Levels
If we factor in the taper, these are the effective corporation tax levels for different profits:
- £50,000: 19.00%
- £75,000: 21.50%
- £100,000: 22.75%
- £150,000: 24.00%
- £200,000: 24.63%
- £250,000: 25.00%
Corporation tax exceptions and provisions
While these new rules apply in most cases, there are a few exceptions and provisions to keep in mind.
Businesses with shorter tax years
Companies with financial years shorter than 12 months (a “reduced tax period”) will see their qualifying thresholds adjusted proportionally. These adjusted thresholds will determine how the business will be taxed.
Working out your adjusted threshold can be complicated, so we’d recommend speaking with your accountant if this could affect your business.
Associated company rules
The tax changes will also apply differently for businesses linked to one or more “associated companies”. According to HMRC, two companies are considered associated with one another if either:
- one company controls the other or
- the companies are under the control of the same person(s)
Here’s how it works for tax purposes: If a company has multiple associated entities within the same accounting year, the standard tax thresholds will be divided by the total number of associated companies.
Helping you navigate the changes
While smaller companies with profits lower than £50,000 will be largely unaffected by the latest corporation tax changes, many businesses will face higher tax bills as a result.
The complex nature of the new rules means they’re also more difficult to navigate, especially if your company is affected by marginal relief.
If you’re confused about how the new rules affect you, why not access our business tax services? We can draw up a tax plan to help ensure you don’t pay more than you need to.