New rates of Corporation Tax from 1 April 2023

As advised in our earlier blog the UK Government March 2021 budget abolished the single corporation tax rate of 19% which has applied since 2015.

From 1 April 2023:-

• the main rate of corporation tax will increase to 25% for all companies with profits of over £250,000

A hybrid corporation tax rate will apply where the company’s year-end straddles 1 April 2023. This will be calculated at 19% for the proportion of the accounting period leading up to and including 31 March 2023 and 25% for the remaining period. 

• companies with profits of less than £50,000 will continue to be taxed at 19% 

• companies with profits of between £50,000 and £250,000 will be taxed at 25%, reduced by marginal relief 

Although marginal relief will reduce the corporation tax payable, any profits that fall between £50,000 and £250,000 will be taxed at an effective tax rate of 26.5%.

Example of marginal relief:

A company with no associates has taxable profits of £100,000 in the year to 31 March 2024

		£
Profits taxable at the main rate of 25%	£100,000 x 25%	£25,000
Less: Marginal relief	[(£250,000-£100,000)  (£100,000/£100,000) x (3/200)]	£2,250
Total tax payable		£22,750

 

Effective marginal rate calculation

		£
Tax at small companies rate	£50,000 x 19%	£9,500
Tax in marginal relief band	£50,000 x 26.5%	£13,250
Total tax payable		£22,750

 

In the above example the effective overall tax rate is 22.75%. However, £50.000 of the profits are taxed at the effective marginal rate of 26.5%.  It is therefore not tax efficient to have taxable profits falling between the small and main rate thresholds.

The upper and lower limits will be proportionally decreased for short accounting periods or if there are associated companies (see below).

Close investment holding companies and non-UK resident companies will be taxed at 25% regardless of the level of taxable profits.

Associated Companies

In addition to the changes in corporation tax rates, there are changes to the definition of associated companies. This will potentially mean more companies being treated as associated.

This will also have an impact on the proportional reductions to the above corporation tax thresholds.

In broad terms, a company is an associated company of another company if one has control of the other, or both are under the control of the same person or persons. This includes non-UK resident companies but excludes dormant and some passive entities.

For the purpose of calculating the rate at which the company pays corporation tax, every company that was associated at any time during the relevant accounting period must be included. Therefore, being associated for even one day in the relevant accounting period will count.

Example of corporation tax rates where there are associated companies:

If your company is associated with 3 others, there will be 4 associated companies in total.

For each of the 4 associated companies, this will reduce the upper corporation tax limit (at which corporation tax is paid at 25%) to  £62,500 (£250,000/4) and the lower limit (at which corporation tax is paid at 19%) to £12,500 (£50,000/4).

Quarterly Tax Payments

Large and Very large companies are required to make quarterly payments of corporation tax.  A Large company has profits in excess of £1.5m and a Very Large company has profits of over £20m.

Under the new rules, the thresholds for determining whether a company is Large or Very large are also divided by the number of associated companies plus one. 

This will mean more companies falling within the quarterly payments regime.

The information in this blog provides only an overview of HMRC guidance and legislation in force at the date of publication and no action should be taken without consulting the detailed HMRC guidance and legislation or seeking professional advice.  Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this blog can be accepted by the firm.

Photo by Aaron Lefler on Unsplash