“When does the corporation tax rate increase?” asked Claire, a client last week. “I’ve read about this in the news. But I don’t really understand if it will affect me or not”.
Claire is correct. An increase to the corporation tax rate for UK companies was announced in October 2022.
The 25% Corporation Tax Rate
The Corporation Tax main rate will increase to 25% from 1 April 2023 for companies with profits over £250,000. A Small Profits Rate (SPR) of 19% will also be introduced from the same date for companies with profits of up to £50,000. This means that if your profits are less than £50k, you will pay Corporation Tax at the same rate as you do at the moment.
Marginal Relief
Where a company has profits between £50,000 and £250,000 a marginal rate of Corporation Tax will apply that bridges the gap between the lower and upper limits. This is called ‘marginal relief’. Profits between these two levels will be taxed at 26.5%.
The effect of marginal relief is that the effective rate of Corporation Tax gradually increases from 19% where profits exceed £50,000 to 25% where profits are more than £250,000.
The amount of Corporation Tax to pay will be found by multiplying your profits by the main rate of 25% and deducting marginal relief. For the fiscal year 2023, the marginal relief fraction will be 3/200.
Planning Ahead
For some businesses, it may be prudent to reconsider associated company relationships before April 2023. This is to avoid partial loss of the lower 19% rate or marginal taper relief.
If you are unsure of how the increase in the corporation tax rate will affect your business, please get in touch.
