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In the March 2021 budget, the government announced that corporation tax rates would increase from April 2023. It is crucial for all businesses, irrespective of whether or not they will be directly affected, to be aware of these changes. In this blog, we will check out all the latest information about the corporation tax rate increase and offer the best practices on how firms can prepare for the change.
Table of contents
● How is corporation tax changing?
● What is Marginal Small Companies Relief (MSCR)?
● Associated companies
● What should you do to reduce your Corporation Tax liability?
● Tips to reduce corporation tax
● Final thoughts
How is corporation tax changing?
Currently, the UK’s trading businesses must pay 19% corporation tax on their taxable profits. For the tax year beginning on 1 April, 2023, the basic corporate tax rate will increase to 25% for businesses with revenues greater than £250,000.
A new 19% corporation tax rate, known as the “small profits rate”, will be applied to profits of £50,000 or less.
Businesses will pay tax at the standard rate of 25% on profits between £50,000 and £250,000. This will be reduced by a marginal relief providing a steady increase in the effective corporate tax rate.
The practical impact of this is that income in the margin (falling between the lower and upper threshold) will pay an effective corporation tax rate of 26.5%.
What is Marginal Small Companies Relief (MSCR)?
The Marginal Small Companies Relief (MSCR) tapers the effect of the increase in the corporation tax rate from 19% to 25%.
The formula to calculate MSCR is: (Upper Limit – Profits) x MSCR fraction
where,
● The current Upper Limit is £250,000
● MSCR Fraction is 3/200
Simply put, profits between £50,0001 and £249,999 will be taxed at 26.5%.
| Profit range | Marginal rate |
| From £0 to £50,000 | 19% |
| £50,001 to £249,999 | 26.5% |
| £250,000 or more | 25% |
Example
Anna is a sole trader selling digital marketing services to startups and small businesses in London and within the M25 area. Her annual turnover is £120,000, and after business expenses, her taxable profits are £75,000.
Her
| Description | Profits | Tax rate % | Tax amount £ |
| Small business rate profits | £50,000 | 19.0% | £9,500 |
| Profits exceeding £50k | £25,000 | 26.5% | £6,625 |
| Total | £75,000 | 21.50% | £16,125 |
So we see an effective rate of 21.50% and a marginal rate of 26.5%. The £16,125 is £1,875 more than the 19% rate.
The effective rate of corporation tax at various profit levels from 1 April 2023 is:
| Profits | The 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; no slicing is needed.
Associated companies
An organisation is classified as an associated company if another organisation controls it or if the same business or individuals control many organisations.
Associated businesses can benefit from the low corporate tax rates through reduced marginal relief. However, the profit ranges will be segmented based on the number of associated businesses.
Even if a business is just associated for a part of the tax period, it will still be categorised as an associated firm. Corporation tax is computed by dividing the profit limits by the number of associated firms.
However, it must be stated that the rules have changed recently. Businesses that share control but do not have a “substantial commercial interdependence” relationship will not be characterised as associated businesses.
If there are no financial and economic links between the firms, they are independent of an organisational standpoint, and they are not characterised as associated when it comes to Corporation tax.
What should you do to reduce your Corporation Tax liability?
If the company’s year-end is near 31 March 2023, consider whether the timing of the business’s income or gains can be influenced, so they arise at an earlier time and be subject to a 19% tax.
It may be beneficial to trigger the gain (through an exchange of contracts) before 1 April 2023 to subject the gain to a 19% tax.
If the business tax period straddles 1 April 2023 and it has massive gains in the early months of the tax period (before 1 April 2023), the business can choose to shorten the year-end to 31 March 2023 so that all profits are taxed at 19%.
Loss-making companies would benefit from carrying their losses forward to apply against future profits to save corporation tax at a rate of 25% instead of submitting a loss carryback claim, which would only result in a tax refund of 19%.
Any substantial bonus, salary or pension payments should be postponed to a later date to enable business tax savings at the higher rate of 25%.
Tips to reduce corporation tax
Reviewing the tax position of your organisation is more critical than ever.
1. Tax credits for research and development
If you have created new or improved products or processes, check your eligibility before submitting a claim because you may be entitled to valuable tax relief.
2. Remuneration planning
Several tax traps can be avoided by effectively planning profit extraction using a combination of dividends and salary.
3. Expenditure timing
Future capital or revenue expenditure should be analysed to gain maximum cash flow benefits and tax savings.
4. Succession and incentives
Allowing employees to purchase shares may align employee and corporate goals.
5. VAT
Changing to a different VAT scheme could defer the time when VAT becomes payable or reduce the amount of paperwork. It is advisable to seek professional advice before beginning a tax review.
6. Understand the structure of your group
If you own many enterprises, it is crucial to be clear about the control issue. To apply the appropriate tax rates to your profits and avoid any penalties, ensure you know whether or not your business is associated.
7. Ensure you are using various reliefs
Utilise the reliefs your company is eligible for while creating your accounts to reduce costs. For particular businesses and situations, different reliefs are offered.
Speak with your accountant to ensure you are minimising your spending as much as possible.
Final thoughts
The UK’s corporation tax rate is currently 19% and is continuously increasing. It is essential to be tax compliant, pay less corporation tax and receive the most tax relief possible. Consulting an accountant is the best option if you need help with your corporation tax.