How much corporation tax should I pay?

Given the strained financial situation many businesses face, estimating how much corporation tax you will have to pay in the future has never been so important.

From 1st April 2023, the main corporation tax rate increased to 25%. A new ‘small profits rate’ of 19% will apply where profits are £50,000 or less.

Where profits range between £50,000 and £250,000, companies will pay tax at the main rate of 25% and reduce this using marginal relief. This will provide a gradual increase in the effective corporation tax rate. A special marginal relief fraction applies and is 3/200. The amount of marginal relief will generally be found by multiplying the fraction by the difference between the company’s profits and the upper profits limit of £250,000. The net result of this adjustment means that profits which range between £50,000 and £250,000, will be subject to tax at an effective rate of corporation tax of 26.5%.

For a company whose profits are £80,000, marginal relief would apply and their corporation tax liability will be found by multiplying their profits by 25% and then deducting marginal relief:

Taxable total profits - £80,000 × 25% (the main rate)	£20,000
Less: marginal relief (3/200 X £250,000 - £80,000)	£2,500
Tax due	£17,450

Blended corporation tax rate 

The corporation tax rate changed from 1st April 2023. For companies with a March year-end, the tax charge will be clear as the change in tax rate is in line with the accounting period. 

For a company with a non-March year-end, they may be taxed at blended rate of corporation tax (partly at the old rate and partly at the new rate). 

Companies benefitting from the small profits rate won’t see any change to their corporation tax rate and will be taxed at 19% pre and post 31st March 2023. 

Other companies with a year-end “straddling” the 1st April 2023 will pay an average tax rate. 

For example, a company with a year end of 31st December 2023 will pay: 

• 19% tax rate from January 2023 to March 2023 (three months) 
• 25% tax rate from April 2023 to December 2023 (nine months) 

Therefore, the average or effective tax rate will be: 19% x 3/12 + 25% x 9/12 = 23.5% 

It’s important to remember that the thresholds of £50,000 and £250,000 to determine which tax rate is applicable will need to be revised based on how long the periods are. In example above you’d need to compare profits in the second period to 9/12ths of the thresholds. 

Associated company rules

The upper (£250,000) and lower (£50,000) limits (which may be revised for a shorter period where a year end “straddles” 31st March) will be apportioned according to the number of companies which are associated for corporation tax. Companies are associated when one has control of the other or both are under common control.

Where companies are under common control but the relationship between one or more companies is not one of ‘substantial commercial interdependence’, they will not be treated as associated for the purpose of the new rules.

These rules are complicated and for companies who have group structures or where the common control issue is relevant, the associated company issue should be considered sooner rather than later so planning can be considered.

More details about the corporation tax rises

You can read further details on the proposed increases here. For tips about what you can take to prepare your business for these challenging times, please click here.

If you would like any advice or assistance in this area please contact us on 0131 659 5888 or use our simple online contact form to arrange a free initial consultation.

 

Date published 28 Nov 2022 | Last updated 10 Apr 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.