Corporation Tax Changes 2023-24

The UK government has implemented changes to the corporation tax system from 1st April 2023. These changes place additional tax burdens on many small businesses, complicating the corporation tax rate system. This article will discuss the details of these changes and their impact on small businesses and offer guidance on tax planning strategies to minimize potential negative impacts.

Key Changes in Corporation Tax Rates: From 1st April 2023, the corporation tax rates have been restructured as follows:

1. For small companies with profits less than £50,000, the tax rate remains at 19%.
2. For businesses with taxable profits exceeding £250,000, the rate increases to 25%.
3. Taxable profits between £50,000 and £250,000 are taxed at 25%, but the tax rate may vary between 19% and 25% due to marginal relief.

The application of marginal relief entails a gradual increment in the effective corporation tax rate. Therefore, small business owners need to forecast their annual profits for the coming year to understand their corporation tax bill under these new rates.

Impact on Different Businesses: The changes in corporation tax rates will affect businesses in various ways, depending on their size and profit levels:

1. Companies generating £50,000 or less in annual profits will continue to pay the current 19% rate in 2023.
2. Companies generating £250,000 or more in annual profits will pay the full 25% rate, significantly impacting their profits.
3. For companies with profits between the lower and upper corporation tax rate limits, additional calculations are required to determine their marginal relief and tax liability.

According to projections for 2023/4, most UK businesses, specifically 70%, will not be required to pay more than 19% in taxes. However, a significant minority of 30% will be subject to higher tax rates, with 10% of businesses having to pay the full 25% tax rate.

Tax Planning Opportunities: Throughout 2023, there will be tax planning opportunities to minimize your corporation tax bill. Some strategies for reducing your corporation tax liability include:

1. Increasing payments, such as salary and pension contributions, to reduce annual profits.
2. Purchasing assets, such as plant and machinery.
3. Claiming all business expenses and business mileage.
4. Utilizing the work-from-home allowance.
5. Claiming R&D Tax Relief and Patent Box Tax Relief.
6. Offering share schemes to employees.
7. Claiming all available loss reliefs and paying for subscriptions and training costs.
8. Organizing staff parties or events.

Marginal Relief Eligibility: If your company’s taxable profits fall between £50,000 (lower limit) and £250,000 (upper limit) starting from 1st April 2023, it may be eligible for Marginal Relief. These limits are proportionately reduced if your accounting period is shorter than 12 months. If a business’s accounting period concludes in proximity to April of the year 2023, it can be assured that its Corporation Tax will be calculated justly and equitably. However, you cannot claim Marginal Relief if you are a non-UK resident company, a close investment holding company, or if your profits (including distributions from unrelated, unassociated companies) exceed £250,000.

Calculating Corporation Tax Rate and Marginal Relief: To calculate your Corporation Tax rate and marginal relief, consult your accountant or use the UK Government’s Marginal Relief Calculator.

Associated Companies: The upper and lower limits for taxable profits are reduced based on the number of ‘associated companies.’ The taxable profit limits are divided equally among all the associated companies. For instance, if your company has two associated companies, the limits are divided by 3, resulting in a lower limit of £16,667 and an upper limit of £83,333. Dormant and holding companies may be exempt from the ‘51% group company test based on their specific circumstances, regardless of location.

Corporation Tax on Chargeable Gains: Selling or disposing of a business asset may require you to pay Corporation Tax on profits or gains. It is essential to consider these chargeable gains when calculating your overall Corporation Tax liability.

The changes in corporation tax rates from 1st April 2023 have introduced a more complex system, placing additional tax burdens on many small businesses in the UK. Business owners need to be aware of these changes, understand their impact on their business, and implement effective tax planning strategies to minimize their corporation tax liability. It is advisable to consult a professional tax advisor or accountant for tailored advice on navigating these changes and optimizing your tax position. If you need help to plan your taxes, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.