This article explains how corporation tax is calculated both prior to and after April 2023 when the rate of tax changed.
Ember's corporation tax estimator uses the below rates and thresholds.
The relevant rates and thresholds are:
Small Profits Rate:
Previous Rate: For Financial Years 2017-2022, the small profits rate was consistently at 19%.
New Rate 2023-24: Remains at 19%.
Applicability: This rate is applicable for single companies with profits up to £50,000.
Main Rate:
Previous Rate: For Financial Years 2017-2022, the main rate was 19%.
New Rate 2023-24: Increased to 25%.
Applicability: The main rate is charged on single companies with profits exceeding £250,000.
Marginal Rate:
Previous Rate: For Financial Years 2017-2022, the marginal rate was the same as the main rate, 19%.
New Rate 2023-24: Now stands at 26.5%.
Applicability: This rate is for profits ranging between £50,001 to £250,000, though marginal relief will apply.
A quick method for Corporation Tax calculation post these changes is as follows:
The initial £50,000 of profits are taxed at the small company rate (19%).
The subsequent £200,000 faces the marginal rate (26.5%).
But if profits are beyond £250,000, then all profits are subject to the main rate (25%).
Understanding the Marginal Rate
To understand how the marginal rate is determined, consider the following:
A company with profits at the lower limit (£50,000) pays Corporation Tax of £9,500 (19% of £50,000).
A company with profits at the upper limit (£250,000) pays Corporation Tax of £62,500 (25% of £250,000).
The differential tax on the additional profit of £200,000 is £53,000, leading to a marginal rate of £53,000 / £200,000 = 26.5%.
Short corporation tax periods, and corporation tax periods crossing over 1st April 2023
If your business has a short corporation tax period, for example if you were in your first year of trading this might be the case, or if part of your corporation tax period fell before 1st April 2023 and part fell after, then the thresholds and potentially the profit figures used in your calculation will be apportioned.
The thresholds in the calculation are based on an annual period lasting 365 (or 366 if a leap year is involved) days.
If your accounting period ran from 1st January 2023 to 31st December 2023, then 90 days of your accounting period falls before 1st April 2023, and 275 days falls after.
Your profit would be apportioned by a factor of 90/365 to be charged at the rates in effect prior to 1st April 2023, and by 275/365 to be charged at the rates in effect after 1st April 2023.
The thresholds where the small profits rate, marginal rate and upper rate are charged will also be apportioned. Using the same example above, they would be apportioned by 275/366 (note the financial year 1st April 2023 to 31st March 2024 contains a leap year, which is why the threshold is apportioned using 366 days).
Summary
It's important for businesses to be aware of corporation tax rates to ensure compliance with the UK tax system and, where possible, to optimise their tax obligations.
Ember’s tax estimator reflects the above rates. It’s worth saying that the estimator makes some assumptions around capital purchases and it cannot take into account other associated companies. It is only an estimate and your accountant will confirm the exact Corporation Tax due when they complete your year end accounts and tax return.