Practical guide: Planning ahead for corporation tax changes

Recap: now and next year

Under the current rules, all companies pay corporation tax (CT) at the rate of 19% on their profits regardless of the level of those profits. There is no difference between the UK rate paid by a small single director company and a large Plc. From 1 April 2023, i.e. the start of the financial year 2023, the rate at which a company will pay CT on its profits will depend on the level of those profits. A main rate of CT of 25% will apply to companies whose profits are above the upper limit. At the other end of the scale, companies whose profits are below the lower limit will pay CT at the small profits rate of 19%. Where profits fall between the limits, the company will pay CT at 25%, as reduced by marginal relief.

The effect of marginal relief is that companies whose profits fall between the two limits will pay CT at an effective rate of between 19% and 25%, the exact rate depending on where in the band they fall.

Upper and lower limits

The lower limit is set at £50,000 and the upper limit at £250,000. However, these are reduced where the company has one or more associated companies. Where this is the case, the limits are divided by the number of associated companies plus one. The lower and upper limit for a company with between none and five associated companies for a twelve-month accounting period are shown in the table below:

 

Number of associated companies	Lower limit	Upper limit
0	£50,000	£250,000
1	£25,000	£125,000
2	£16,667	£83,333
3	£12,500	£62,500
4	£10,000	£50,000
5	£8,333	£41,667

 

The limits are also proportionately reduced where the accounting period is less than twelve months, so for a six-month accounting period the lower profits limit is £25,000 and the upper profits limit is £125,000, while for a nine-month period of account, the lower profits limit is £37,500 and the upper profits limit is £187,500.

Companies must be aware of the lower and upper profit limits of relevance to them. They may mistakenly believe they won’t pay at the main rate of CT where there are a number of companies with profits below £250,000, but that may not be the case if they are associated.

Marginal relief

Companies whose profits fall between the lower and upper limits benefit from marginal relief. This reduces their effective rate of CT to below 25%.

Marginal relief is calculated in accordance with the formula F x (U-A) x N/A, where:

• F is the marginal relief fraction (set at 3/200 for the financial year 2023)
• U is the upper limit
• A is the amount of augmented profits (profits plus dividends from non-group companies); and
• N is the amount of total taxable profits.

Calculating the CT liability

The following examples illustrate the calculation of the CT liability where the accounting period is twelve months in length and falls wholly on or after 1 April 2023.

Example. A Ltd has no associated companies. It prepares its accounts to 31 March each year. If its profits for the year to 31 March 2024 are £30,000, it will pay CT at the small profits rate of 19% as its profits do not exceed the relevant lower limit of £50,000. Its CT bill will be £5,700 (£30,000 @19%) and its effective rate of CT will be 19%.

Example. B Ltd has one associated company. Consequently, it has a lower limit of £25,000 and an upper limit of £125,000. It prepares accounts to 31 March each year. B Ltd has profits of £40,000 for the year to 31 March 2024. As the profits fall between the lower and upper limit (as adjusted to take account of the fact it has one associated company), it will pay CT at the rate of 25%, as reduced by marginal relief.Its profits and its augmented profits are both £40,000.

B Ltd is entitled to marginal relief of £1,275, calculated as follows:

3/200 (£125,000 - £40,000) x £40,000/£40,000

B Ltd will therefore pay CT of £8,725 ((£40,000 @ 25%) - £1,275). It has an effective rate of CT of 21.8%.

Example. C Ltd has three associated companies. Consequently, it has a lower limit of £12,500 and an upper limit of £62,500. It prepares accounts to 31 March each year. C Ltd has profits of £100,000 for the year to 31 March 2024. As its profits exceed the upper profits limit (as adjusted to take account of its three associated companies), it will pay CT at the main rate of 25%. C Ltd will therefore pay CT of £25,000 (£100,000 @ 25%). It has an effective rate or corporation tax of 25%.

Periods straddling 1 April 2023

Where the period of account spans 1 April 2023, to work out the CT it is necessary to split the accounting period in two - the period prior to 1 April 2023 and the period on or after 1 April 2023. The profits for the accounting period are time apportioned. Those for the period before 1 April 2023 are taxed at 19%, while those for the period after 1 April 2023 are taxed at the relevant rate, depending on the level of profits.

Where the accounting period spans 1 April 2023, remember to time apportion the upper and lower limits to ascertain the relevant limit applying for that period.

Example. D Ltd has profits of £300,000 for the year to 30 September 2023. It has no associated companies. The accounting period is split into two periods - the six -month period from 1 October 2022 to 31 March 2023, the profits for which are £150,000 (6/12 x £300,000) and which falls in financial year 2022 and the profits for the six months to 30 September 2023 (also £150,000) which falls in the financial year 2023. Its profits for the financial year 2022 (£150,000) are taxed at 19%, meaning CT of £28,500. Its profits for the financial year 2023 (£150,000) exceed the time-apportioned upper limit of £125,000 and are taxed at 25%. The associated CT is £37,500. The total CT for the year to 30 September 2023 is £66,000, an effective rate of 22%.

Action needed now

Any twelve-month period that starts after 1 April 2022 will span 1 April 2023, so it is not too early to start thinking about the impact of the changes. Where accounts are prepared to 30 April, the period to 30 April 2023 will span 1 April 2023 and some of the profits will be taxed in accordance with the new regime. The year to 30 April 2023 will start on 1 May 2022.

If the changes will increase the CT payable, accelerating profits where possible into the last period to fall wholly before 1 April 2023 will save tax, as will delaying expenditure until a period that spans 1 April 2023 or starts on that date. For CT groups, consideration should also be given whether the existing group structure remains beneficial and also whether disincorporation is worthwhile.