Starting from 1st April 2023, significant changes to the Corporation Tax rates will come into effect, impacting companies with varying levels of annual profits. Here’s a breakdown of the new rates:
- Main Rate Increase: The main rate will rise from the current 19% to 25% for companies with annual profits exceeding £250,000.
- Small Profits Rate: Companies with profits up to £50,000 will continue to be charged at the existing 19% rate.
- Marginal Rate Application: An effective rate of 26.5% will be applied to annual profits ranging from £50,000 to £250,000.
- 25% Rate for Profits over £250,000: Corporations with profits exceeding £250,000 will be subject to a flat 25% Corporation Tax rate.
Understanding the Effective Rate of 26.5%
The effective tax rate of 26.5% is implemented to ensure that companies with profits exceeding £250,000 are taxed at the 25% main rate while properly accounting for the marginal rate. Marginal Relief allows for a gradual increase in the Corporation Tax rate between the small profits rate and the main rate, resulting in a reduced overall rate for taxable profits between £50,000 and £250,000.
Illustration of Marginal Relief Calculation:
Let’s consider a hypothetical example with profits of £60,000:
- The first £50,000 is taxed at 19%, resulting in a tax liability of £9,500.
- The next £10,000 is taxed at 26.5%, leading to a tax liability of £2,650.
- The total tax liability for £60,000 is £12,150.
Previously, if all profits were taxed at 19%, the Corporation Tax liability would have been £11,400. Due to the rate increase, there is an additional £750 owed.
Marginal Relief Calculation Formula:
The Marginal Relief is calculated using the formula (U – A) x N/A x F, where U represents the Upper Limit (£250,000), A denotes Augmented Profits, N indicates Taxable Total Profits, and F represents the Standard Marginal Relief Fraction (3/200). The upper and lower limits may be adjusted in cases of a short accounting period or associated companies.
In cases where profits fall between £50,000 and £250,000, it is more practical to calculate the tax by multiplying a percentage of the profit by 19% and 26.5% rather than applying the complex formula repeatedly.
| Profits | Tax | Actual Rate |
|---|---|---|
| £0.00 | £0.00 | N/A |
| £5,000 | £950 | 19% |
| £10,000 | £1,900 | 19% |
| £25,000 | £4,750 | 19% |
| £35,000 | £6,650 | 19% |
| £50,000 | £9,500 | 19% |
| £60,000 | £12,150 | 20.25% |
| £75,000 | £16,125 | 21.50% |
| £100,000 | £22,750 | 22.75% |
| £150,000 | £36,000 | 24% |
| £200,000 | £49,250 | 24.625% |
| £250,000 | £62,500 | 25% |
| £300,000 | £75,000 | 25% |
Conclusion
The Corporation Tax rate changes will impact companies differently based on their level of profits and associated companies. To optimize your Corporation Tax bill, we recommend reading our comprehensive guide on reducing tax liabilities. As a director-shareholder of a single company, the liability and rate you can expect to pay will depend on your company’s level of profit.
