We first published an article on the Corporation Tax increase back in November 2022, but now we’re in the new tax year we wanted to provide a refresher on the rules for those affected. This is what you need to know.
Before April 2023, all companies paid Corporation Tax at the rate of 19%.
With the start of the tax year in April 2023, Corporation Tax split into two rates:
The main rate of tax is 25% for Companies with profits of £250,000 or more – 25% applies to all profits
A Small Profits Rate of 19% applies to Companies with profits of £50,000 or less
Taper relief is available between these thresholds.
Understanding the impact of Taper Relief
This is going to take a little bit of understanding both by businesses and accountants that have not seen taper relief before. Technically Corporation Tax will apply as follows
If profits exceed £250,000, the main rate of 25% will apply to all profits
If profits are £50,000 or less the Small Company rate of 19% will apply to all profits
Where profits are between these thresholds, the main rate of 25% will apply with the company being entitled to Marginal Small Companies Relief (MSCR)
Marginal Small Companies Relief (MSCR)
MSCR tapers the effect of the increased rate on a company where profits are between the lower and upper thresholds.
The MSCR calculation is:
(Upper Limit – Profits) x Basic profits x MSCR fraction where the
Profits
Upper Limit is £250,000
Basic profits are the company’s trading profits / gains
Profits are Basic Profits plus Franked Investment Income (FII is generally Dividends received from other companies)
MSCR Fraction is 3/200ths
The MSCR is the difference between the main rate and marginal rate of Corporation tax expressed as a fraction, so 26.5%-25% = 1.5% = 3/200
For those with a headache already, there is a simpler expression that will accurately work out the Corporation tax due, where there is just basic profit to tax (and no FII).
Profit Band | Marginal Rate |
£0 - £50,000 | 19% |
£50,000 – 249,000 | 26.5% |
£250,000 plus | 25% |
Applying these bands will give the same result as applying the formula given above and are much easier to use. Let us prove it to you.
A company has basic profits of £125,000 and no FII. Applying the complex formula,
As profits are over £50,000 Corporation tax is charged at 25%
Corporation tax due £125,000 x 25% = £31,250
MSCR can then be applied using the complex formula
(£250,000 - £125,000) X £125,000 X 3/200 = £1,875
£125,000
Net corporation tax due is £31,250 - £1,875 = £29,375
We obtain the same result applying the simplified rates in the table to profits of £125,000
Up to £50,000 @ 19% £9,500
£125,000 -£50,001 @ 26.5% £19,874.73
Total tax payable £29,375
Marginal Rates and Effective Rates
It is important to understand the difference between the Marginal rates and Effective Rates of tax. The headlines will report a Marginal Rate of 26.5%, implying that some businesses are paying beyond the Main rate of Corporation tax at 25%, but this isn’t the case.
Companies with profits between £50,000 and £250,000 will pay a Marginal rate of Corporation tax of 26.5% on profits within that bracket but their effective rate of tax will be less than 26.5%.
Take a company with profits of £150,000 and applying the flat table rates,
The first £50,000 Taxed at 19% £9,500
The next £100,000 Taxed at 26.5% £26,500
Total tax payable £36,000
Whilst the Company has a marginal rate of 26.5% it’s overall effective rate of tax is 24% (£36,000/£150,000). This £36,000 is the same result as charging the whole £150,000 profits at 25% and applying the MSCR.
The effective rate of Corporation tax applies to the whole of the Company’s profits and at no point exceeds the main rate at 25%.
The effective rate at various profit levels will be
Profits | £50,000 | £75,000 | £100,000 | £150,000 | £200,000 | £250,000 |
Effective CT % | 19% | 21.5% | 22.75% | 24% | 24.63% | 25% |
Multiple Company Rules – watch out!
Where there are associated Companies the £50,000 and £250,000 thresholds will be apportioned. This includes companies not based in the UK and means that the Main Rate of Corporation Tax applies sooner. The upper and lower limits will be proportionately reduced for short accounting periods.
Associated companies are those where:
One has control of the other; or
Both are under common control
Where associated companies exist, the thresholds are apportioned. A group with two companies will see the upper and lower limits divided by two, meaning the profit level at which a marginal rate will apply could be more easily breached.
There are a number of exclusions from the associated company rules:
Dormant companies are excluded from the associated company rules
Where a “passive” holding company exists a company will not be treated as an associate of another. A “passive” holding company is one where a company only receives dividends from its subsidiaries and pays these to its shareholders, and the company receives no other income or expenses.
Where companies are under common control but the relationship between one or more companies is not one of “substantial commercial interdependence” they will not be treated as associated for the purpose of the new rules
For example, husbands and wives are connected parties for tax. On the face of it, a company run by Mr A will be associated with a company run by Mrs A. However, if Mr A is the director and sole shareholder of Company A which operates a shoe shop and his wife runs a restaurant through Company B, the nature of the two businesses is completely different commercially. Provided there are also no financial or economic links between the companies, and they are organisationally independent, they are not associated for these purposes.
With the Corporation tax rules becoming more complex its vital you seek advice from your accountant to plan ahead. Orange Genie Accountancy clients have access to a dedicated accountant who over the coming months will be looking at how the Corporation Tax changes will affect their businesses.