The main rate of corporation tax rose from 19% to 25% on 1 April 2023, affecting companies with profits of £250,000 and over.
The legislation stated that small companies with profits up to £50,000 continued to pay corporation tax at 19%. Profits between the two limits were subject to a tapered rate.
All UK companies had to pay corporation tax on the profits they generated. The profits of unincorporated businesses, such as sole traders and partnerships, were taxed via self-assessment.
New rates & thresholds
The corporation tax rise 2023 applied to profits exceeding £250,000 a year. Around 10% of all UK companies paid the full higher rate, according to the Spring Budget 2021 documents.
The Government established a ‘small profits rate,’ which kept corporation tax at 19% on profits of £50,000 or less.
As a result, 70% of actively trading companies – around 1.4 million businesses – remained completely unaffected.
For profits between £50,000 and £250,000, the Government introduced a taper to limit the increased tax burden on medium-sized companies.
If a company made a profit of £300,000, all of it was taxed at 25%, not just the amount above £250,000. This was different from income tax, where portions of income are taxed at gradually increasing rates after a tax-free allowance.
How the taper worked
Companies and organisations could claim marginal relief if their profits from 1 April 2023 were between £50,000 (lower limit) and £250,000 (upper limit).
However, these limits were proportionally reduced if the company’s accounting period was shorter than 12 months. The limits were also proportionally reduced by the number of associated companies the company had; this was referred to as the ‘adjusted limits.’
For example, if a company had three other associated companies, the limits were divided by four. This reduced the lower limit to £12,500 and the upper limit to £62,500.
Companies could not claim marginal relief if they were non-UK resident companies or close investment holding companies.
To work out the amount of tax, companies used the following formula:
(Adjusted upper limit – Augmented profits*) x (taxable total profit ÷ augmented profits) x (standard marginal relief fraction).
The Government developed a digital calculator on the gov.uk website to automatically calculate corporation tax after marginal relief.
All companies needed was information related to the equation above, along with the start and end dates of their accounting period.
*Augmented profits are ‘taxable total profits’ and any exempt distributions received from companies that are not 51% subsidiaries or held through a consortium.
What was the Marginal Relief Fraction?
In the equation the Government provided, the marginal relief fraction was 3/200ths. This represented the difference between the main rate and the marginal rate expressed as a fraction.
The Government explained where this fraction came from:
- Corporation tax payable on the upper limit = £62,500 (because £250,000 x 25% = £62,500).
- Corporation tax payable on the lower limit = £9,500 (because £50,000 x 19% = £9,500).
- The tax payable difference between the limits was £53,000.
- Dividing £53,000 by £200,000 (the difference between the upper and lower limit) gave the marginal rate of 26.5%.
- The difference between the marginal rate of 26.5% and the main rate of 25% is 1.5%, which could also be expressed as 3/200.
Mitigating corporation tax
Although the corporation tax rise 2023 affected many companies, they could still benefit from tax planning.
For example, the Annual Investment Allowance remained at its highest-ever permanent level of £1 million from 1 April 2023.
Meanwhile, the R&D expenditure credit (RDEC) increased from 13% to 20%, offering more tax money back for innovative projects.
However, the SME additional deduction was cut from 130% to 86% from 1 April. Also, the SME credit decreased from 14.5% to 10%. This aimed to “improve the competitiveness of the RDEC scheme.”
Several tax reliefs were also available for creative industries, including video games tax relief, film tax relief and various television reliefs.
The Government promised in the Autumn 2022 Statement to “build upon the success of the audio-visual subset of the creative industry tax reliefs” to “further incentivise the production of culturally British content.”
Contact Peter Alvarez on 0161 761 5231 to discuss your tax planning and other ways to reduce your corporation tax liability or email theteam@horsfield-smith.co.uk.
