Corporation Tax – managing the 25% rate

Since April 2023, the main rate of Corporation Tax has increased from 19% to 25% for companies with profits over £250,000. A small profits rate of 19% remains for those with profits under £50,000, with marginal relief in between.

This significant increase means that tax-efficient planning—such as maximising capital allowances, utilising R&D tax credits, and reviewing director remuneration—is now even more critical for protecting your company's bottom line.

Understanding marginal relief

If your company's profits fall between £50,000 and £250,000, you will pay tax at the 25% rate but receive 'marginal relief'. This essentially creates an effective tax rate that gradually increases from 19% to 25% as your profits rise. However, the calculation means that profits falling within this band are actually taxed at a marginal rate of 26.5%. Managing profits around these thresholds is a key area for tax planning.

Associated companies

The thresholds of £50,000 and £250,000 are divided by the number of 'associated companies' you have. Broadly, companies are associated if one controls the other, or if both are under the control of the same person or group of persons. If you have multiple companies, your thresholds will be significantly lower, pushing you into the higher tax rates much sooner.

Mitigation strategies

To mitigate the impact of the 25% rate, companies should ensure they are claiming all available deductions. This includes accelerating capital expenditure to utilise the Annual Investment Allowance or Full Expensing, making employer pension contributions for directors, and ensuring that all qualifying Research & Development activities are identified and claimed for. Timing income and expenditure carefully around the company's year-end can also be highly effective.