Corporation Tax - it's changing!

There's always been a flat rate of Corporation Tax, and it's presently 19%.

But from April 2023, this is changing.

The details

The main rate of Corporation Tax will be 25% for Companies with profits of £250,000 or more, and this applies to all profits.

• A Small Profits Rate of 19% will exist for Companies with profits of £50,000 or less.

• There will be a taper of between £50,000 and £250,000, at which point a 'marginal relief' will kick in. It sounds messy, and it's probably going to be.

What is Marginal Relief?

Put simply, Marginal Relief tapers the amount of Corporation Tax that companies pay, thus negating some of the effect of the new 25% rate.

Let's look at an example.

Joe Bloggs Ltd has profits of £150,000.

His standard CT at the new rate will be calculated as £150,000 x 25% = £37,500

Now let's calculate the marginal relief:

Step 1 - £150,000 x 25% = £37,500

Step 2 - £250,000 - £150,000 = £100,000

Step 3 - £100,000 x 3/200 = £1500

Step 4 - £37500 - £1500.00 = £36000

The Corporation Tax will therefore be £37,500 - £1500.00 = £36000.00

This equates to a rate of 24%. Compare this to the same figures at the 19% rate, calculating out to £28500, you can see that it's quite a hike.

What happens if my accounting period doesn't line up with the changes?

If your business has a year-end of 21st March, it's quite simple. You'll pay 19% corporation tax for the whole of the 2022-23 year.

But if your company has a year-end that straddles the 1st of April (the date the changes take place), then you'll pay a hybrid rate of 22% (an average of the two rates).

If this reflects your position, then please base any corporation tax estimates on this percentage rather than your usual 19% rate.

Is there any action that we can take?

Well, if you're considering any large expenditure, (and we're talking large items of equipment here), then you could do worse than delaying the purchase until after April, to take advantage of the tax relief at the higher rate.