The government has “U-turned” over it’s previous announcement to retain a flat 19% corporation tax charge on company profits – and has announced that a main rate of corporation tax of 25% from 1st April 2023 will go ahead.
Does the increase in the main rate of corporation tax apply to my company?
No – you only pay the full rate of 25% if your taxable profits are above the upper profits limit of £250,000.
If your taxable profits fall below £50,000, then corporation tax is charged at the standard small profits rate of 19%.
What if my profits fall between £50,000 and £250,000?
The simple answer is that your company benefits from marginal relief– this mean your effective corporation tax rate will be between 19% and 25% – if your taxable profits are for example, £100,000:
Company has year end of 31st March 2024:
| £100,000 @ 25% | £25,000 |
| Less: upper profits limit £250,000 – £100,000 @ 3 / 200 | (£2,250) |
| Effective rate of corporation tax (22.75%) | £22,750 |
Examples of effective Corporation tax rates:
| Profits | Effective rates | Corporation tax |
| £50,000 | As profits are £50,000 or less, then the small companies rate of 19% will apply. | £9,500 |
| £100,000 | 22.75% | £22,750 |
| £150,000 | 24% | £36,000 |
| £200,000 | 24.62% | £49,250. |
| £250,000 | As profits are above £250,000, then the full mainstream rate of corporation tax of 25% will apply. | £62,500 |
| £300,000 | As profits are above £250,000, then the full mainstream rate of corporation tax of 25% will apply. | £75,000 |
What are augmented profits?
The marginal rate calculation is tweaked slightly if the company receives dividends from non- group companies. Dividends received from external companies are added to taxable profits (hence “augmented profits”) – the effect of this is that the inclusion of the dividend income become subject to corporation tax.
Are there any instances where I would not qualify for marginal relief?
If your company is a close investment holding company in the period then it does not qualify for marginal relief and the main rate of corporation tax is charged on taxable profits – this applies generally to companies which hold non-rental investment income or rent properties to connected individuals to the trading company.
Are there any issues with regards to associated companies?
A company is an associated company of another If you have any associated companies- then the tax rate band rate limits must be divided between a company and its associated companies when you calculate marginal relief. The impact of this it that it becomes likely that the companies will attract higher rates of corporation tax between them up to the main rate of corporation tax.
What is an associated company?
A company is an associated company of another at any time when one of the two has control of the other or both are under the control of the same person or persons. Companies are associated companies if they are under the common control of individuals or trustees as well as other companies. Where businesses are owned by associates of that person (or persons), if the relationship between one or more companies is not one of substantial commercial interdependence, they will not be deemed as associated. A company does not have to be UK based to be associated, however, a dormant company can be excluded from being an associated company for the purpose of dividing the limits.
Example:
A company has an associated company (therefore two associated companies in total).
The upper profits level and lower profits level are both divided by two – so £125,000 and £25,000.
Therefore if profits for the year ended 31st March 2014 are £30,000, then marginal rate relief are applied as profits fall between £25,000 and £125,000.
| Corporation tax £30,000 @ 25% | £7,500 |
| Less: upper profits limit £125,000 – £30,000 @ 3 / 200 | (£1,425) |
| Effective rate of corporation tax (20.25%) | £6,075 |
My accounting period straddles 1st April 2023 – how is my corporation tax calculated?
- Profits are apportioned between pre – 1st April 2023 and post 1st April 2023 – profits are charged at the “old rate” of 19%.
- Profits post 1st April 2023 are apportioned (and tax rate limits) and charged to tax at the main rate of corporation tax (with marginal relief as appropriate).
Example
A company has profits of £90,000 for the 12 months ended 31st October 2023.We need to apportion profits and upper/lower limits over the period as follows:
| Annual | FY 2022 | FY 2023 | |
| 12 months | 5 months | 7 months | |
| Upper limit | £250,000 | N/A | £145,833 |
| Lower limit | £50,000 | N/A | £29,167 |
| Total Profits | £90,000 | £37,500 | £52,500 |
| FY 2022 | £37,500 @ 19% | £7,125 | |
| FY 2023 | £52,500 @ 25% | £13,125 | |
| Less: marginal relief £145,833 – £52,500 x 3 / 200 | (£1,400) | ||
| Effective rate 20.94% | £18,850 | ||