Corporation Tax Rates increase in April 2023 – Lets start planning now!

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As from 1 April 2023, corporation tax is increasing from its current rate of 19%.

As from 1 April 2023, companies with profits more than £50,000 will see their tax liabilities increase.

The government announced that companies with profits of £50,000 or less will continue to pay tax at a rate of 19%.

For companies with profits more than £250,000, the tax rate will be 25% - so a significant 6% increase.

If the company's profits are between £50,000 and £250,000, marginal relief can be claimed, meaning the overall tax rate will be less than 25%.

However, you may think that if your profits are between £50,000 and £250,000, the profits in that "band" are taxed at less than 25% - this is not the case!! The way the marginal relief is calculated means that any profits more than £50,000 but below £250,000 are effectively taxed at 26.5%.

We will not go into the technical details of the marginal relief calculation, but an example of how the tax will be calculated as from 1 April 2023 is as follows:

Example:

ABC Ltd show total profits of £200,000 (it has no associated companies). As a result of the profits falling between £50,000 and £250,000, marginal relief will apply.

The marginal relief available is £750. So rather than paying tax at 25% on the whole profit (i.e., £50,000), the company's tax liability would be £49,250.

So, how do we get the 26.5% tax rate??

Well, although the marginal relief is calculated in a certain way, the following highlights the effective 26.5% tax rate:

£50,000 @ 19%£9,500

£150,000 @ 26.5%£39,750

Total Tax Payable£49,250

So, you can see the band between £50,000 and £250,000 is taxed at effectively 26.5%

Company owners should also remember dividends taxes and employers national have increased……so a potential significant extra tax burden on businesses.

So, what can we do??

Each case must be looked at on its own merits, but there may be steps to take to minimise your exposure to the effective tax rate of 26.5%. Careful use of losses, accelerating profits or delaying expenses being just some of the potential options, in the right circumstances.

But certainly, business owners should be considering now the potential extra tax costs they may face.

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Wednesday, 25 May 2022

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