What is the corporation tax rate from 1 April 2023?

What is the corporation tax rate from 1 April 2023? Andy Gibbs ATT CTA of TaxAssist Accountants explains how corporation tax is increasing and how best to prepare for the increase.

What is the corporation tax rate from 1 April 2023?

Businesses face a sharp increase in the rate of corporation tax, and need to put in place a plan to budget for the change and consider implementing tax planning measures to mitigate the impact.

The changes are as follows:

The main headline rate of corporation tax is set to increase significantly from 19% to 25% where profits exceed £250,000.
Where company profits are more modest and are fall below £50,000, a lower rate of corporation tax of 19% will continue to apply.
When profits fall between £50,000 and £250,000, a special marginal relief kicks in with the result that profits falling in the margin (between the £250,000 and £50,000 limits), will be charged an effective rate of 26.5%.

Example

For a company whose profits are £80,000, marginal relief would apply and their corporation tax liability is found by multiplying their profits by 25% and then deducting marginal relief:

Taxable total profits - £80,000 × 25% (the main rate)	£20,000
Less: marginal relief (3/200 X £250,000 - £80,000)	£2,550
Tax due	£17,450

Remember, where profits fall below £50,000, the corporation tax rate will remain at 19% and where profits exceed £250,000, the corporation tax rate will be 25%. Marginal relief only needs to be considered where profits fall between the upper and lower limits.

These limits are apportioned for short accounting periods and for ‘associated companies’.

Close investment-holding companies will pay the full rate of 25% irrespective of profits, but this will not include property investment companies.

In addition, non-UK resident companies will not be eligible to use the 19% rate and will not be entitled to any marginal relief.

What are associated companies?

The upper and lower tax limits are reduced in proportion to the number of companies which are ‘associated’ for tax purposes.

This concept can get quite complicated in certain situations but, very broadly, a company is associated with another when either:

one has control of the other
both are under common control

Some important exclusions apply for companies that do not carry on a trade or a business, and for passive holding companies.

Where businesses are under common control but the relationship between one or more companies is one of ‘substantial commercial interdependence’ they will not be deemed as associated.

For example, Mr A is the director and sole shareholder of Company A which operates a shoe shop. His wife runs a restaurant through Company B. The two companies are in different lines of business and on the basis there are no links between them as they operate entirely independently. Therefore, despite the two companies being operated by associated individuals, they are not associated for these purposes.

Alternatively, if the circumstances were different and Company A and Company B were considered associated, the upper and lower limits would be apportioned between the two companies, and this would increase the amount of corporation tax due.

If we extend our example of a company whose profits are £80,000, the upper limit is reduced from £250,000 to £125,000 and this causes an increase in tax due.

Taxable total profits - £80,000 × 25% (the main rate)	£20,000
Less: marginal relief (3/200 X £125,000 - £80,000)	£675
Tax due	£19,325

Under the old rates, the company would have faced a tax bill of £15,200 (£80,000 X 19%) but now faces a tax bill of £19,325, an increase of £4,125.

What can you do to prepare for the corporation tax increases?

Business should prepare for the increase in corporation tax by modelling the impact on their cashflow and updating their business plans to factor in the rising tax rate. It may then be possible to consider planning to mitigate the impact of the tax rise.

Future capital and revenue expenditure should be reviewed to maximise both tax and cashflow advantages.

For larger companies, because the new associated company rules will impact the quarterly instalments payments regime which applies to larger corporates, it is important to be clear on the impact on group company instalment payments.

For smaller companies, directors may need to review their remuneration and incentive planning as the traditional dividend and salary mix may be less tax efficient at certain profit levels.

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

About the author

Andy Gibbs ATT CTA is Group Technical Manager at TaxAssist Accountants, and is a qualified Chartered Tax Adviser (CTA) and holds the STEP Advanced Certificate in Trust and Estate Accounting. He has dealt with both tax compliance and tax advisory projects across a range of industry sectors.

Find out more

Corporation Tax (GOV.UK)

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Publication updated: 24 April 2023

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.