Corporation Tax Rates - What’s Changed?

From 1st April 2023, there are now two rates of corporation tax.

This is a huge change to a company’s tax affairs. The last time there were two different rates of corporation tax, Jess Glynne’s Hold My Hand was at Number 1 in the charts - yes, that’s right, the song that now reminds everyone of their last delayed Jet2 flight.

There are likely a number of business owners who are not familiar with the two-rate system, and a host of directors who have long forgotten what it means to their business. To help, we’ve summarised below some of the key changes to the rules below.

Please note, this is not exhaustive and if you would like further clarification as to how this change in rules will affect you, you should contact our tax team in our Glasgow office.

What are the Rates?

The main rate of corporation tax has increased from 19% to 25% from 1 April 2023. This applies to companies with total taxable profits in excess of £250,000.

There is also a small profit rate which applies to qualifying companies with total taxable profits of under £50,000. If your company does not qualify for the lower rates (e.g. close investment holding company), you will pay tax at 25% on all of your profits.

These thresholds will reduce depending on whether there are “associated companies” and are also annual limits so will be proportionately reduced for periods less than 12 months.

If you run a qualifying company with profits below this £50k threshold, essentially nothing has changed unless you have “associated companies” - we’ll talk about those later.

But first, what happens if your profits are between these thresholds? This is where “marginal relief” comes in.

Marginal Relief

This applies to businesses with profits between the main threshold and the small profit threshold. It is designed to stop a particular profit level acting as a cliff edge when it comes to the rate of tax payable.

But how does it work?

If your company has total taxable profits of, say, £100,000 in the year ended 31st March 2024 and no associated companies. Your tax liability will look something like this:

Tax on £100,000 @ 25% = £25,000

Marginal Relief ((£250,000 - £100,000) x 3/200) = (£2,250)

Total tax liability = £22,750

There are additional steps in the calculation for periods that straddle the 1st April 2023, as well as complications for those with associated companies and those with profits that include distributions (e.g. dividends from investments).

You will note that this means that the company with £100k profit has an overall tax rate of 22.75%, rather than 19% or 25%. However, this also works out that the tax rate for profits between the two thresholds of £50,000 and £250,000 are effectively taxed at 26.5% (marginal rate)!

Based on the example above, the first £50,000 taxed at 19% = £9,500, the second £50,000 incurs tax of £13,250 (26.5%).

Associated Companies

We’ve mentioned associated companies more than a few times so far, so what are they?

Well, simply, 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. Unlike the old 51% group companies rules, which are also repealed under the 2023 changes, an associated company is defined primarily due to common control rather than its shareholding.

An associated company is counted even if it is an associated company for only part of the year. However, an associated company which has not carried on any trade or business at any time during the accounting period is disregarded.

These rules are important as the limits of £50,000 and £250,000 will be proportionately reduced where there are associated companies.

Summary

The new rules create an array of complexities when it comes to calculating a company’s tax liability. Between marginal rates, marginal reliefs, associated companies and upper and lower limits, it is certainly now more complicated than it has been for the last 8 years or so.

Our team of experts can discuss with you the availability of allowances and reliefs to mitigate any tax liability arising from your company’s profits as well as taking on the burden of your accounts and tax return preparation/submission. This provides you with the peace of mind that your tax affairs are under control and your business is not paying more tax than it has to.

Contact our office in Glasgow city centre on 0141 221 6516, email enquiries@mmmca.co.uk, or use the contact form in our Contact page to discuss with one of our team.