WHAT WILL MY CORPORATION TAX RATE BE?
Released On 6th Apr 2023
Since 1 April 2015 this has been an easy question to answer. From this date, differential rates depending on the level of a company’s taxable profits disappeared for most companies. Life was simple and the rate was 19%.
It has been well publicised that the rate is increasing to 25% from 1 April 2023 but there are a number of added complications which will result in many companies paying a different rate, at least until 2024. These arise from:
- Different rates for companies with taxable profits of less than £250K
- Blended rates for companies that have something other than a March year end
- Special rules for the splitting of tax bands for companies that are associated with other companies
The first two of these are straightforward mathematical exercises, but the third is more complicated and requires an element of judgement.
Small company and marginal rates
Despite the announced rise in the rate of corporation tax, a standalone company with taxable profits below £50K will continue to pay tax at 19%.
For those with profits in excess of £250K, the full amount will be subject to tax at the new rate of 25%.
The complication arises for those companies with profits above £50K but below £250K. Marginal relief will apply to profits within this range to smooth the transition between the 19% and 25% rates. The tax due is calculated by applying a complex formula and despite the ‘smoothing’ it has the effect of increasing the tax due on profits within this range to 26.5%.
For a single company with a March 2024 year end and profits of £100K, assuming it receives no dividend income from non-group members, its tax charge for the year will be £22,750 (£50K at 19%, plus the balance of £50K at 26.5%).
The full 25% rate will also apply to all profits made by a “Close Investment Holding Company” and those not resident in the UK, irrespective of the level of profits earned. A company is deemed to be a Close Investment Holding Company unless it either carries on a trade on a commercial basis or invests in property for the purposes of letting to unconnected third parties. The most obvious example is a company whose only activity is the making of stock market investments.
Blended rates for non-March year ends
Corporation tax rates apply for fiscal years which run from 1 April to 31 March. If a company’s accounting year falls into two fiscal years then its profits are time apportioned between the two (there is no need to try and calculate the actual profit arising in each period).
HMRC have released an online tool to help companies calculate their expected tax liability, including any marginal relief that may be due.
