The impending Corporation Tax rise, and how it will affect your Small to Medium sized business
14th December, 2022
As a business owner, you may be aware, following the latest Budget announcements, that from April 2023 onwards, the main rate of Corporation Tax will rise from 19% to 25%. Although the current 19% rate will still apply if your company’s profits are £50,000 or less, you will need to pay more tax on profits above this level.
Currently, there may still be some confusion about the rise, as the April 2023 Corporation Tax rise was first announced by Chancellor Rishi Sunak in March 2021. It was subsequently announced in the ‘Mini’ Budget of 23rd September, 2022 that the increase was to be scrapped but due to the negative reaction of the Capital Markets and the subsequent couple of weeks of turmoil, the then-PM, Liz Truss, announced that Rishi’s hike in the rate of Corporation Tax was, in fact, to go ahead.
So, how much more tax will small limited companies pay from April 2023 onwards?
The main rate of Corporation Tax will rise from 19% to 25%. However, smaller companies will not have to pay the full rate. It depends on the level of your profits for each fiscal year (a fiscal year runs from 1 April to the following 31 March).
The current 19% rate will still apply – if annual profits are at, or below a new £50,000 threshold.
The full 25% rate applies to companies with annual profits of £250,000 or higher.
If profits fall between these two rates, a system of marginal relief will apply.
How will ‘marginal relief’ work between the two rates of Corporation Tax?
Assuming the new system of taper relief will be the same as that used for CT in the 2014/15 tax year, which was the last time when marginal relief applied to CT, we use, as an example, the following formula to calculate your level of tax liability:
Annual profit figure of £80,000.
- a) Multiply the company’s annual profits by the main 25% rate (£20,000).
- b) Subtract the annual profits from the £250,000 threshold (£170,000).
- c) Multiply step (b) by the marginal rate multiplier of 3/200* (£2,550).
- d) Take away step (c) from step (a) – £20,000 – £2,550 (£17,450).
So, in this example, the CT liability is £17,450. This represents a tax increase of £2,250.
Another way of looking at the calculation is that you pay £9,500 of tax on the first £50,000 (£50,000 times 19%) and £7,950 on the next £30,000 (£17,450 less £5,900). So the marginal rate of tax, the tax rate on the next pound of profit, in the band between £50,001 and £250,000, is 26.5% and the overall effective rate, the rate you pay as whole, is 21.8%. So a small company increasing your profits above £50,000, will pay a tax rate higher than the biggest of companies.
Furthermore, if you are operating more than one company, where one company is controlled by another, then the upper and lower limits will be proportionately reduced.
What can I do to mitigate the tax rise?
There is not much on trading profits. Reducing or not increasing profits will limit tax liabilities. Capital investment, taking advantage of the super-deduction of 130% will help in the short term.
If you have any capital assets, disposing of them before 31 March 2023 will mean the tax rate will be 19% on any gain.
Please do get in touch with your Client Manager at Haggards Crowther if you need any more clarity on how the increase in Corporation Tax, from April 2023, will affect you and your business. We will be more than happy to talk through your situation with you.
* For the fiscal year 2023, the marginal relief fraction is 3/200.