Corporation Tax is levied on the profits earned by companies and businesses. With the beginning of the financial year on April 1st, 2023, some changes have been introduced to the UK's Corporation Tax rates. This article explains these changes, clarifying their implications on various businesses.
We have updated our corporation tax estimator to reflect the below changes (however we do not account for clients who have associated companies - more info below)
What's changed?
From the onset of 1st April 2023, these are the notable changes in Corporation Tax rates for companies:
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.
Additional Notes on the Changes
Companies earning profits between £50,000 (lower limit) and £250,000 (upper limit) are subjected to the main rate, but they can benefit from marginal relief which is obtained by using the marginal rate on profits above £50,000 and below £250,000
Close Investment Holding Companies (CIHCs) are required to pay Corporation Tax at the main rate, irrespective of their profit levels.
The upper and lower limits are apportioned according to the number of companies which are Associated for Corporation Tax. So if you are a shareholder of one other company that you have control over, your limits will be reduced by 2 (£25,000 small profits rate and 125,000 main rate) for both companies.
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%.
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%).
As an illustration, a company with its year ending on 31st March 2024, having profits of £100,000 without associated companies and exempt distributions, would owe a Corporation Tax of £22,750.
First £50,000 * 19% = £9,500
Next £50,000 * 26.5% = £13,250
Total = £9,500 + £13,250 = £22,750
Average rate (some times referred to as the marginal or effective rate) £22,750 / £100,000 = 22.75%
Remember these thresholds are adjusted if you have fall into the associated companies ruling mentioned above.
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
The new financial year has brought about substantial changes in the Corporation Tax rates, aiming to adapt to the evolving economic landscape. It's important for businesses to be aware of these changes to ensure compliance with the UK tax system and, where possible, to optimise their tax obligations.
Ember’s tax estimator has been adjusted to reflect all of the above changes so you should see a reliable estimator as you have always done in the Ember app. 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 Ember will confirm the exact Corporation Tax due when we complete your year end accounts and tax return.