How will the rise in corporation tax affect SMEs? – April 2023

From the 1st April 2023, the main rate of corporation tax for all companies in the UK will increase from 19% to 25%. 

Businesses that earn less than £50,000 in profits over a financial year will pay the lower rate. All companies earning more than £250,000 in profits will pay the full rate automatically. For organisations earning between those two figures a marginal relief will apply, meaning these businesses will pay an effective rate of corporation tax between 19 and 25%. 

This could obviously have a profound effect on the amount of tax a company would be expected to pay to HMRC. So you’re prepared for your end of year reporting, we’ve put together a checklist on all things corporation tax. Here are the questions we’ll answer in this article: 

What is corporation tax? 

Corporation tax is tax paid on profits by all limited companies based in the UK, and any foreign organisation with a base in the UK. For those companies headquartered in the UK, corporation tax is payable to HMRC based on profits made at home and abroad. 

Taxable profits include: 

Businesses will need to inform HMRC of their profits (or lack thereof), and generally are required to pay their tax burden within 9 months of the related financial year. 

Need help managing your business’s profits? Get in touch with the team at Pennyhills today to stay ahead of your corporation tax reporting.  

Why is corporation tax rising? Background on policy

This rise was first proposed in the March 2021 budget of then Chancellor, Rishi Sunak. It was subsequently scrapped by Kwasi Kwarteng in the Autumn of 2022, before it was reinstated during Liz Truss’s tumultuous premiership. 

Corporation tax has been steadily cut over the past four decades. In the early 1980s, profits were taxed at 50%. 

Supporters of this change in legislation would argue that the burden of big businesses to pay their way has diminished significantly, and this increase marks a return to a sensible rate of tax for large profits. However, detractors would argue it stymies smaller businesses’ ability to grow. Regardless of the debate, the reality is that a significant percentage of SMEs will have to calculate for a higher tax bill at the end of the next financial year. 

What are the new corporation tax rates? What can I expect my business to pay? 

Businesses generating less than £50,000 in profits will continue to pay 19% corporation tax. 

Corporations generating more than £250,000, will pay the full rate of 25%. 

For those companies that generate profits between these two benchmarks, a marginal relief will apply, giving a company an effective corporation tax rate between 19% and 25%. Let’s look at an example below to see how that might work in practice. 

Company A has no associated companies, no profits generated from investments, and they use the standard financial year to report its profits. They have a trading profit of £75,000 over the previous 12 months.

Under current legislation, they would be expected to pay £14,250 in corporation tax. 

With the new rates, this business would be expected to pay £16,125, an effective tax rate of 21.5%, representing an of £1,825 in corporation tax.

This table shows the effective tax rate for profits between the two benchmark figures: 

Effective CT%21.5%22.75%23.5%24%24.63%

You can use this tool from HMRC to calculate your business’s expected corporation tax burden. You can also see how the government calculates the marginal relief in more detail, once you have entered your figures.

How will the changes to corporation tax affect businesses with shorter accounting periods or associated companies?

This calculation does change for businesses with shorter accounting periods or associated companies. There hasn’t been much guidance from the government on the details, beyond this explanation in their announcement of the change in rate: 

“The lower and upper limits will be proportionately reduced for short accounting periods and where there are associated companies.”

Broadly speaking, both having a shorter accounting period or associated companies will significantly reduce the marginal relief a business can expect on its corporation tax, if it generates profits between £50,000 and £250,000 in profits. 

For example, Company B has two associated companies, and generates £100,000 in profits across all three businesses. Rather than receiving marginal relief, and paying the effective tax rate of 22.75% on its profits, Company B will be expected to pay the full 25%. 

This is because the upper limit of £250,000 is divided by the number of associated businesses’ profits. Therefore Company B and its associated businesses have a corporation tax marginal relief threshold of £83,333.33. 

Again, the corporation tax calculator will be of great help to businesses that may use shorter accounting periods, or have associated entities. 

Where can I find further information about the rise in corporation tax? 

The government website has a number of resources on corporation tax, which you can find linked below: 

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