Corporation Tax rates are changing for accounting years starting on 1 April 2023. From this date, there will no longer be a single Corporation Tax rate on profits.
Where a company has a year end that is not 31 March, annual profits are time apportioned into two periods; one up to 31 March 2023 and one after. Corporation Tax will be paid on apportioned profits up to 31 March 2023 at 19% and from 1 April 2023, Corporation Tax will be paid at any of the effective rates of 19%, 26.5% or 25% on the latter profits.
For most companies, the small profits tax rate will be 19% on profits up to £50,000 pa. The tax rate for profits in excess of £250,000 will increase to 25% on all profits. However, companies with profits between £50,000 and £250,000 will pay the main rate of 25%, but reduced by marginal relief. The effectively Corporation Tax for these latter companies will be 19% on the first £50,000 of profits and then 26.5% on any profit above £50,000 (but less than £250,000).
The Corporation Tax rate on company profits prior to 1 April 2023 is 19%, no matter the amount of profits.
How to manage the increase in tax
As tax rates may be increasing for your company, from 1 April 2023, it may be sensible to plan for how to manage this. We can provide customised advice for each client.
In general, profits should be generated before 31 March 2023, rather than after that date, to ensure the lowest rate of Corporation Tax is paid. Consequently, if it is possible to move income or profit to before 31 March 2023, steps should be taken to do this.
Similarly, capital gains should be realised before 31 March 2023. Any discretionary trading expenditure or capital [fixed asset] equipment purchases should be deferred until after 31 March 2023 to help reduce profits in the latter period and therefore save Corporation Tax.
As noted above, the highest marginal rate of Corporation Tax is payable on profits between £50,000 and £250,000. Where possible profits should be reduced in this marginal band in order to maximise the Corporation Tax savings.
The whole profits of an accounting year are time apportioned, unless a more appropriate basis is selected. Simply shifting profits to before or after 31 March 2023, with an single accounting year, will not have the full desired effect unless there are two separate accounting years that end and start either sided of 31 March 2023.
Associated companies
Where you, or you and a connected person, control more than one limited company, your companies may be deemed to be associated. In this situation, the £50,000 band is divided by the number of associated companies.
Broadly, a company is associated with another company if at any time within the preceding 12 months one company has control of the other or if both are under the control of the same company or person or persons. Control is generally determined by the amount of share capital that a person or persons control together with any of their connected persons.
Connected persons include husband and wife, civil partners, any parent or remoter ancestor, any child or remoter descendant, or any brother or sister.
Example
Adam and his wife, Eve, equally own Alpha Limited, Beta Limited and Gamma Limited. Adam and Eve are connected persons through marriage.
IN this case, the £50,000 and the £250,000 bands are divided by three, to £16,667 and £83,333 respectively.
If Alpha Limited generated a profit of £5,000, it would pay Corporation Tax at 19% i.e. £950.
If Beta Limited generated a profit of £75,000, it would pay Corporation Tax of £18,625 (19% x £16,667 + 26.5% x £58,333).
If Gamma Limited generated a profit of £85,000, it would pay Corporation Tax at 25% i.e. £21,250
The total Corporation Tax payable would be £40,825.
However, if the aggregate profits of £165,000 (£5,000 + £75,000 + £85,000) were divided equally between all three companies, Corporation Tax of £39,975would be payable, a saving of £850. This is because part of the 19% band of £16,667 for Alpha was ‘wasted’, with Beta and Gamma paying marginal rates of Corporation Tax of 26.5% and 25%.
Professional tax advice
Companies subject to Corporation Tax should consider obtaining professional advice to determine how the increase in the Corporation Tax rate and the operation of marginal relief will impact them. This can be a complex area, where it is easy to make errors and pay more tax than is necessary.