The March 2021 budget included the announcement that corporation tax rates will rise from April 2023. It is essential for all firms, regardless of whether or not they will be directly affected, to be aware of these changes.
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In this blog, we will bring all the latest information about the upcoming corporation tax rate rise and offer the best tips on how businesses can prepare for the change.
Table of contents
Getting ready for the corporation tax rate increases in April 2023
- How is corporation tax changing?
- What is Marginal Small Companies Relief (MSCR)?
- What can you do to minimise your Corporation tax liability?
- 7 Tips to reduce corporation tax
- Final thoughts
How is corporation tax changing?
UK trading businesses currently pay 19% corporation tax on their taxable profits. However, the main corporate tax rate is set to rise to 25% for the financial year beginning on 1 April 2023, where profits exceed £250,000. Many investment companies will also be subject to this rate.
Profits of £50,000 or less will continue to pay tax at 19% “small profits rate” of corporation tax.
Businesses that make between £50,000 and £250,000 in profits will pay tax at the standard rate of 25%. This will be lowered by a marginal relief offering a gradual increase in the effective corporate tax rate. The practical effect is that profits in the margin (falling between the lower and upper limits) will pay an effective corporation tax rate of 26.5%.
What is Marginal Small Companies Relief (MSCR)?
The Marginal Small Companies Relief (MSCR) is a relief that tapers the effect of the increase in the corporation tax rate to 25% from 19%.
The simple formula to calculate MSCR is:
(Upper Limit – Profits) x MSCR fraction
where
- The current Upper Limit is £250,000
- MSCR Fraction is 3/200ths
| Profit range | Marginal rate |
| From £0 to £50,000 | 19% |
| £50,001 to £249,999 | 26.5% |
| £250,000 or more | 25% |
As an example for profits of £60,000.
| Description | Slice | Rate % | Tax |
| 1st slice of profits | £50,000 | 19.0% | £9,500 |
| 2nd slice of profits | £10,000 | 26.5% | £2,650 |
| Total | £60,000 | 20.25% | £12,150 |
So we see an effective rate of 20.25% and a marginal rate of 26.5%. The £12,150 (£750 more than the 19% rate).
The effective rate of corporation tax at various profit levels from 01 April 2023 is:
| Profits | Effective corporation tax rate |
| upto £50,000 | 19.00% |
| £75,000 | 21.50% |
| £100,000 | 22.75% |
| £150,000 | 24.00% |
| £200,000 | 24.625% |
| £250,000 or more | 25.00% |
This Effective Rate applies to the total profits and no slicing is needed.
ASSOCIATED COMPANIES
If another company controls a firm, or if the same corporation or individuals own many companies, it is categorised as an associated company (under common control).
Associated companies can take advantage of the low corporation tax rates through reduced marginal relief. The profit ranges, however, will be divided according to the number of associated businesses.
Even if they are just associated for a part of the accounting period, they will still be classified as an associated firm. Corporation tax is determined by dividing the profit thresholds by the number of associated businesses.
However, it must be noted that the regulations have recently changed and that organisations that share control but do not have a “substantial commercial interdependence” relationship will not be categorised as associated organisations.
If there are no economic and financial links between the businesses, they are independent from an organisational perspective, and they are not classified as associated when it comes to Corporation tax.
What can you do to minimise your Corporation Tax liability?
Consider whether the timing of the company’s income or gains can be influenced, so they arise at an earlier period and be taxable at 19% if the company’s year-end is close to 31 March 2023.
It may be advantageous to trigger the gain (through an exchange of contracts) before 1 April 2023 to subject the gain to a 19% tax.
If the firm financial period straddles 1 April 2023 and it has considerable profits in the early months of the financial period (before 1 April 2023), the firm can consider shortening the year-end to 31 March 2023 so that all gains are taxed at 19%.
Instead of filing a loss carryback claim, which would only result in a tax refund of 19%, loss-making businesses would benefit from carrying their losses forward to apply against future profits to save corporate tax at a rate of 25%.
Any substantial salary, bonus, or pension payments should be postponed to a later date to enable company tax savings at the higher rate of 25%.
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7 Tips to reduce corporation tax
Reviewing the tax position of your business is more important than ever.
1. Tax credits for research and development
Check your eligibility before filing a claim if you have developed new or better goods or procedures because you may be eligible for valuable tax relief.
2. Remuneration planning
Numerous tax traps can be avoided by planning effective profit extraction using a combination of salary and dividends.
3. Expenditure timing
Revenue expenditure or future capital should be evaluated to achieve maximum tax savings and cash flow benefits.
4. Succession and incentives
Business owners could consider providing employees the opportunity to capture shares to help align employee and company goals.
5. Invest in plant and machinery
There are generous first year and aannual investment allowances on items of plant and machinery. You can claim these to reduyce yoru corporate tax bill.
6. Be clear on your group structure
It’s essential to be extremely clear about the control issue if you own multiple businesses. To apply the proper tax rates to your profits and avoid any fines, ensure you understand whether or not your firm is associated.
7. Make sure you are using all kinds of reliefs
When creating your accounts, you should ensure that you are saving costs by utilising reliefs available to your company. Various reliefs are available for enterprises and industries. To ensure you are cutting expenditures as much as possible, speak with your accountant.
Final thoughts
Corporation tax is 19% and has been steadily declining in the UK, but that is set to change from 01 April 2023.
It is essential to be tax compliant, get maximum tax reliefs, and pay less corporation tax. Consulting an accountant will be an ideal option if you need assistance with your corporation tax.
