Corporation Tax – the upcoming rate increase

In a significant shift in UK tax policy, the main rate of Corporation Tax will increase from 19% to 25% starting in April 2023. This is the first increase in decades and will have a substantial impact on the profitability and cash flow of many businesses.

However, the 25% rate will not apply to all companies. A Small Profits Rate of 19% will be reintroduced for companies with lower profits, and marginal relief will apply for those in between.

The new thresholds

From April 2023, companies with profits of £50,000 or less will continue to pay Corporation Tax at the 19% Small Profits Rate. Companies with profits over £250,000 will pay the full 25% main rate on all their profits.

For companies with profits between £50,000 and £250,000, tax will be calculated at the 25% rate, but they will be entitled to 'marginal relief'. This relief gradually bridges the gap between the 19% and 25% rates. In practice, this means profits falling within this band are taxed at an effective marginal rate of 26.5%.

Associated companies

The £50,000 and £250,000 thresholds are divided by the number of 'associated companies'. Broadly, companies are associated if one controls the other, or both are under the control of the same person or persons. For example, if a business owner has two separate limited companies, the thresholds for each company will be halved to £25,000 and £125,000. This rule is designed to prevent business owners from artificially splitting their profits across multiple companies to stay within the 19% band.

Planning for the increase

With the tax rate rising, the timing of income and expenditure becomes crucial. Where possible, companies may wish to accelerate income into the current 19% tax year, or delay significant tax-deductible expenditure (such as large pension contributions or non-super-deduction capital purchases) until after April 2023, when the relief will be worth 25%.