Plan Ahead for Increases in Corporation Tax Rates – Effective from 1 April 2023
In the Autumn Budget the UK Government voted to increase corporation tax rates with effect from 1/4/2023. Ahead of these upcoming changes, it’s a good idea for your company to assess how you will manage the increased rate (should it apply to you). By planning ahead for the financial change, you’re less likely to be caught off guard when your Company tax bill arrives.
The rate will increase to 25% for companies whose taxable profits exceed £250,000. For companies with profits of less than £50,000, the current 19% rate will still apply. Companies with taxable profits between £50,000 and £250,000 will pay tax at the 25% rate reduced by a marginal relief such that overall, they will pay on a sliding scale between 19% and 25%.
If companies are looking to dispose of chargeable assets within the next few years, they should consider bringing forward the date of the disposals to before 1 April 2023 in order to benefit from the lower rate.
My accounting period doesn’t line up with the changes, what does this mean for me?
For companies whose year-end is the 31st of March and are making profits in excess of £250,000, the changes are quite simple: they will pay 19% corporation tax for the whole of the 2022/2023 period, and then 25% for the whole of the 2023/2024 period. However, companies whose accounting period straddles the 1st of April, a hybrid rate of the two taxes will be applied at 22%. This represents the 19% tax for the proportion of their accounting period leading up to and including the 31st of March, and then 25% for the remaining period. It’s important to base your estimates on this rate, rather than your usual 19% rate.
Impact of new rates associated Companies
For associated companies (note: not group companies), the new corporation tax upper and lower rates will be divided by the number of associated companies. This means that if your company is associated with 4 other companies, there are 5 associated companies, reducing the upper threshold from £250,000 to £50,000. Similarly, the lower threshold would be reduced from £50,000 to £10,000. Therefore a Company who is associated with 5 others with profits of £50,000 or more will be liable to corporation tax at 25% rather than the current 19%.
According to HMRC, a company is an associated company of another, if one of the two has control of the other, or both are under the control of the same person or persons.
Ideas for reducing taxable profits and mitigating the tax liability
- Ensure that Director/Owners are taking a salary equivalent to £12,570 (2022/23 personal allowance level), this will save £3,142.50 tax at the 25% rate, or £2,388 at the 19% rate.
- Postpone capital investment if likely to breach the higher profit threshold of £250,000, until tax year 2023-24. This will optimise capital allowance and annual investment reliefs and reduce taxable profits at 25% rather than 19%.
- Consider increased director/owner pension contributions, not only is this a tax-free benefit to workers but an excellent way of reducing taxable profits. Remember there is up to £40,000 pension contributions allowable per individual, which could generate a tax saving at £10,000 each.
- Claim all business related costs: Working from home allowance, business mileage, director’s rent, work/staff party, training and subscription costs.
- Consider the best use of taxable losses in 2022-23, would they be best to carry forward and offset against future profits at 25%, or carry back to offset against profits at 19%.
Table showing the current and new corporation tax rates
|
Profits £50,000 or under |
Profits £50,001 to £250,000 |
Profits over £250,000 |
|
|
Current rate |
19% |
19% |
19% |
|
From 1/4/2023 |
19% |
Marginal Rate 19% – £25% on a sliding scale |
25% |
Credit: Multiple sources, GOV.UK, MHA Macintyre Hudson, MGR Weston Kay LLP
