As we are now into April 2023, there are new rates of corporation tax in force following an overnight change that came into effect on 1 April 2023.

We have already discussed these changes in a recent video and earlier articles, but it is a significant change and there are steps that can be taken to mitigate the impact on your company if action is taken at the right time.

From 2015 until 31 March 2023, there was a flat-rate system in place, with company profits being taxed at a fixed rate of 19%, making tax charges standard and predictable.

However, from 1 April 2023 the rate of corporation tax paid will depend on the level of profits made by the company. This is somewhat complicated by rules regarding the reduction in those profit limits depending on whether there are any ‘associated companies’ – more on that later.

The Basics
The three categories for corporation tax are now:

• If a company’s profits are less than £50,000, the corporation tax rate will remain at 19%.
• If a company’s profits are more than £250,000, corporation tax rate will increase to 25%. This is now the ‘main rate’ of corporation tax.
• If a company’s profits fall between £50,000 and £250,000, corporation tax will be calculated at the main rate of 25%, but this will be reduced by ‘marginal relief’. This ‘marginal relief’ provides a gradual increase in the overall corporation tax rate from 19% to 25% as profits increase towards the main rate threshold of £250,000.

The Complexities
As ever with taxation, the rules are not quite as straightforward as this makes it sound. Some additional factors to consider are:

• The profit thresholds are shared between associated companies. For these purposes, companies are associated if:
  – One of the companies has control of the other
  – Both companies are controlled by the same companies or people.
• If the accounting period is less than 12 months then the limits are reduced proportionally.
• Where a company’s profits fall between £50,000 and £250,00 (adjusted as necessary for associated companies and short accounting periods) there is an effective rate of 26.5% on the profits falling within the two thresholds.

What action can you take?
Clearly there will be a big impact from these changes, but with planning it may be possible to reduce your company’s exposure to these higher rates of tax. As always, how effective this planning can be will depend on the availability of reliable, up-to-date financial information as well as having good communication about your future plans for the company.

Contact us to discuss how this change will affect your company and discover if there is any action you can take to help the situation.