Corporation Tax Rate Changes

In the March 2021 Budget Rishi Sunak proposed a number of changes to the way that Corporation Tax will be calculated and applied and these changes will come into effect from 1st April 2023.

In summary of the changes:

• The “Main Rate” of Corporation Tax will increase from 19% to 25% with effect from 1st April 2023.
• Companies with profits of £50,000 or less will remain on the “Small Profits Rate” of 19%.
• Companies with profits between £50,000 and £250,000 will effectively pay Corporation Tax between 19% and 25% by applying ‘Marginal Relief’ to the full 25% value.
• Marginal Relief is given as: 3/200ths of the value of profits less than £250,000 (i.e. Marginal Relief = (250,000 – Profit)*3/200). So the overall tax payable for these companies will be calculated as follows: (Profit x 25%) – Marginal Relief
• Companies with profits of £250,000 or more will pay the “Main Rate” of 25%.
• Short Accounting Periods – Where the company has a short accounting period of fewer than 12 months, the limits (£50k and £250k) are reduced on a pro-rata basis, based on the days in the accounting period.
• Long Accounting Periods – Where the company has a long accounting period of greater than 12 months, this is treated as two accounting periods (12 months plus the remainder).
• Associated Companies – The limits (£50k and £250k) are reduced where the company has associated companies. In order to apply this, divide the limits by one plus the number of associated companies.
• Transitional Rules – Transitional rules will apply to all companies that don’t have a 31st March 2023 year-end. In these instances, accounting periods that straddle the 1st
• April 2023 must be time apportioned and treated as two separate short accounting periods for Corporation Tax purposes. This means that BOTH the profits and limits (£50k and £250k) must be time apportioned by the accounting period. The period before the 1st of April 2023 will have Corporation Tax applied at 19%, and the period after 1st
• April 2023 will have Corporation Tax applied at the new rates.
• Dividends – While dividends received by Companies are not subject to Corporation Tax directly in the company of receipt, dividends received from non-subsidiaries must be included along with profits when determining the amount the marginal relief that should be applied.

There are some exceptions to these rules: close investment holding companies, non-resident companies, multinationals, oil and gas companies, banks, and companies based in Northern Ireland, where other specific rules will apply. But most “typical” SME businesses will be subject to the new rules.

There are a number of key takeaways from the above changes that need to be considered by our clients. Specifically:

• Corporation Tax rates are increasing for everyone!
• The calculation that must be applied for the accounting period, which straddles the cutover date of 1st April 2023 is quite complicated by virtue of the transitional rules. Albeit the overall rate of Corporation Tax payable this year will be lower than in future years because for companies which earn more than £50k in profits, some of the profit this year will still be subject to tax at 19%.
• The number of “Associated Companies” (defined in more detail below) becomes very significant in calculating the rate of Corporation Tax that must be applied in each company.
• While the effective rate of Corporation Tax will be between 19% and 25% for companies with profits between £50k and £250k, the “Marginal Rate” (or the amount of CT paid on each additional £1 of profit) is 26.5%! This is essential knowledge for tax planning because it means that our clients can save 26.5% (or 26.5p in CT) of every £1 reduction in profitability between these limits (e.g. by recording additional expenses, pension contributions, etc).