The 2023-24 tax year may seem a long way off, but it is important that companies are prepared for changes to the system.
The main rate of Corporation Tax (CT) will rise to 25 per cent for the financial year commencing on 1 April 2023, but it is slightly more complicated than the headline figure and the rate will vary depending on company profits.
How will companies be affected?
For companies recording profits of £50,000 or less, the ‘lower profits limit’, the current CT rate of 19 per cent will still apply, but those firms with profits between £50,000 and £250,000, the so-called ‘upper profits limit’, will pay the main CT rate of 25 per cent.
However, they will receive what is known as marginal relief to cut their tax bill which increases the rate incrementally, as profits rise, until the upper limit of 25 per cent is reached for firms with profits of £250,000 or more.
The lower and upper profit limits are reduced proportionately where the accounting period is less than 12 months. They are also reduced where a company has one or more associated companies.
Broadly, a company is associated with another company at a particular time if, at that time or at any other time within the preceding 12 months:
- One company has control of the other
- Both companies are under the control of the same person or group of persons.
Effectively, the full amount of CT at the rate of 25 per cent is calculated before marginal relief is deducted.
By way of an example, for a standalone company with profits which fall between the lower and upper profits limits, the corporation tax liability can be calculated by multiplying its profits by the main rate of 25% and then deducting marginal relief. A company with profits of £100,000 for the year to 31 March 2024 would pay corporation tax of £22,750 ((£100,000 @ 25%) – £2,250). This gives an effective rate of corporation tax of 22.75%.
The calculations are quite complex so we can help you with to assess the likely impact of these changes, as well as advising on tax planning measures which can be taken to help manage your overall tax liability – this could include reviewing your group structure and eliminating surplus companies, pension and remuneration planning, capital allowance planning, assisting with R&D tax relief claims amongst other measures. To find out how the changes to CT will affect your business, please contact us.