Corporation Tax Rates From April 2023
Corporation tax rates increase on 1st April 2023 for many companies. We will explain how your corporation tax rate changes from April 2023. You will need to know your expected annual net profit and the number of companies associated with yours.
Corporation Tax Rate Changes
From 1st April 2023 the UK main corporation tax rate increases from 19% to 25%. However, some companies will pay between 19% and 25%, depending on the profit for the year and the number of associated companies.
The relevant profit to use is the company’s taxable profit for the year. To find this you need to start with the company’s net profit. This is its sales, plus other income, minus costs like salaries and depreciation but not dividends and not corporation tax itself. Then you add back onto the net profit any costs that are not tax deductible such as depreciation and entertainment. Deduct any income that is not taxable such as dividend income. You can also usually deduct the cost of equipment purchased during the year, which is called a capital allowance. Now you should be close to the taxable profit, which is relevant to work out your tax rate.
You also need to know the number of companies associated with yours. For this you’ll need to read our separate post: what is an associated company? If you have associated companies you’ll need to read the Reducing The Corporation Tax Thresholds section below.
Corporation Tax Thresholds
The lower limit is £50,000 and the upper limit is £250,000. So if you have no associated companies, you’ll pay corporation tax at 19% if your profits are less than £50,000. You’ll pay 25% corporation tax if your profits are over £250,000. If your profits are between these thresholds, you’ll pay a total rate on all of the profits somewhere between 19% and 25%. It’s tapered so that if you’re just over £50,000 you’ll pay just over 19%. Similarly if you’re just under £250,000 you’ll pay just under 25%.
Reducing The Corporation Tax Thresholds
The tax thresholds need to be divided by one plus the number of associated companies. So if you have one associated company, add one (for your own company) to make two. Then divide the thresholds by two so the lower one is £25,000 and the upper one is £125,000. So if your profits are £25,000 or less you will pay 19% corporation tax. Or if your profits are over £125,000 you’ll pay 25%.
Also, if your accounting period is shorter or longer than 1 year, you’ll need to proportionally reduce or increase the thresholds. So if you have a 9 month accounting period, the thresholds become £37,500 and £187,500.
The examples below assume that you don’t need to reduce the thresholds. If you have to reduce the thresholds, you will need to reduce the £50,000 and £250,000 referred to below e.g. in the marginal relief formulas.
Corporation Tax Rates Between The Thresholds
If your profits are between the thresholds, you use the main rate of 25% on all of your profits. Then there is a marginal relief formula to work out how much to reduce this by. Ignoring dividends received, the formula is (£250,000 – taxable profits) x 3 / 200. So profits of £100,000 would be taxed at 25% which is £25,000 minus marginal relief. Entering £100,000 into the formula makes it £150,000 x 3 / 200, which is £2,250. So the corporation tax is £22,750 which is 22.75%.
Marginal Rates of Corporation Tax
Another simpler way to work out the corporation tax is to use the marginal rate of 26.5%. The first £50,000 of profits are taxed at 19%, then the next £200,000 of profits are taxed at 26.5%. Then you add them together. So with £100,000, £50,000 at 19% is £9,500, then the remaining £50,000 is taxed at 26.5% which is £13,250. Added together this gives a total of £22,750.
Save Tax At Marginal Rates
As the marginal rate between the thresholds is 26.5%, that is the rate of tax you will pay or save on any increase or decrease to your taxable profits within the thresholds. So if it looks like you will have taxable profits of £60,000, paying pension or charitable contributions of £10,000 will save you tax at 26.5% which is £2,650. Wages or a bonus could also work but you will need to consider whether any PAYE and NIC payable will outweigh any corporation tax savings.
If your company receives dividends, these are not taxable but they may affect the corporation tax rate. Dividends received are effectively added to profits when calculating the marginal relief formula. So if your company receives a substantial amount of dividends it could end up paying 25% tax even if its taxable profits are less than £250,000. The full marginal relief formula is (£250,000 – (profits + dividends)) x (profits / (profits + dividends)) x 3 / 200. Or ask your accountant!
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