In the Spring Budget 2021, the Chancellor announced a rise in Corporation Tax (CT) from 19% to 25% which will take effect from 1 April 2023. There was a collective sharp intake of breath across the nation and this is one of the big changes to business tax that needs your attention now.
The higher rate of 25% CT is effective for companies with profits over £250,000, whilst for those with profits below £50,000, the rate will remain at 19%. Businesses earning profits of between £50,000 and £250,000 can claim marginal relief in order to reduce the CT from 25%. This relief is calculated automatically with a complex formula and also applies to companies whose accounting period is less than 12 months or if there are associated companies.
The full 25% CT rate is calculated before marginal relief is deducted, therefore offsetting ‘augmented profits’ against the total taxable profits. Augmented profits are defined as the company’s total taxable profits plus exempt distributions from non-group companies, including dividends, assets or the transfer of assets, liabilities or repayment of share capital.
Depending on a company’s profit levels, it is well worth managing the opportunities to reduce your profits below the marginal relief limit if possible. For instance, consider the timing of equipment purchases and the level of pension contributions.
When an accounting period spans 1 April 2023, the profits apportioned to the 2022 financial year are taxed at 19% and those within the 2023 financial year are taxed at the appropriate rate depending on the profit level.
Associated companies
If your company is associated with another company, ie. one company has/had control over the other or both companies are/were controlled by the same person or group during the previous 12 months, this will impact their CT.
The upper and lower profit limits are reduced for companies with up to five associated companies on a sliding scale. For instance, for a company with one associated company, the upper profits limit is £125,000 and the lower profits limit is £25,000 and for companies with five associated companies, the upper profits limit is £41,667 and the lower profits limit is £8,333.
Although the rise in Corporation Tax is large and is likely to affect around 1.4m businesses, the UK still has the lowest CT of all G7 countries. Now is the time to instigate mitigation strategies to reduce your business’ CT liability as far as possible.
As with all complicated new tax procedures, it is always wise to consult the experts. CRM Oxford can assist businesses at all profit levels to maximise their return and minimise their tax obligations. Give the friendly, approachable team a call on 01865 379272.
