Are you prepared for the Corporation Tax rise from 1 April 2023?

The main rate of Corporation Tax will rise to 25% from 1 April 2023 for companies whose profits exceed £250,000. For companies with profits of less than £50,000, the rate will remain at the existing rate of 19%. For those in between, a new ‘tapered rate’ will apply. Senior Manager Matthew Smith examines the changes.

From 1 April 2023, the flat rate of Corporation Tax of 19% will no longer apply, and the rate payable will depend on the level of a company's profits.

In brief: 

·      Companies whose profits exceed the ‘upper profits limit’ of £250,000 will pay at the new rate of 25%

·      Companies with profits of less than £50,000 will pay at the ‘small profits’ rate of 19%

·      Companies whose profits fall between £50,000 and £250,000 will pay at the main rate of 25%, but this will be reduced by marginal relief (see below).

How will the marginal relief work?

The formula for calculating the marginal rate is detailed but (except in some circumstances) effectively means the company will pay 19% on profits up to £50,000 and a marginal rate of 26.5% on profits between £50,000 and £250,000.

For example, a company with profits of £90,000 would pay 19% on £50,000 (£9,500) and 26.5% on £40,000 (£10,600), giving a total tax liability of £20,100. This works out at an effective Corporation Tax rate of 22.33%.

Associated companies

There is a return to the old rules about “associated companies”, ie a group of companies under common control. Where there are associated companies, the above thresholds are divided by the number of companies in the group. So, in a five-company group, the upper threshold reduces from £250,000 to £50,000 (one-fifth of £250,000) and the lower threshold from £50,000 to £10,000. 

What if a company’s financial year straddles 1 April 2023? 

If a company’s financial year straddles 1 April 2023, its profits will be apportioned by reference to the number of days in the financial year falling before 1 April and the number of days after. It will pay 19% on those profits apportioned to the financial year 2022 and at the new rate (whatever that may be) for profits apportioned to 2023.  

What action should you take?

If the new rates will apply to you, you may wish to consider whether there is merit to considering possible planning opportunities such as (but not limited to) a change of year end or deferring expenditure that may prove helpful. If you would like to explore this further, we would be happy to speak with you. 

If you have any queries relating to the new Corporation Tax rates, please contact Matthew Smith at matthew@sandersgroup.co.uk.

Please note, the content of this article is for information purposes only and should not be relied upon as formal advice.