Insights

For UK companies, one of the biggest taxes to be planning ahead for is the increase to corporation tax. The new rate will be effective from 1 April 2023.

Currently all companies, regardless of the size of their profits, suffer corporation tax at the rate of 19%. It is an historically low rate,  and it will continue to be effective until 31 March 2023.

After this date, a new higher rate comes into effect for companies with profits over £50,000. They will face a corporation tax rate of 25% - a significant increase.

All companies with profits below £50,000 will continue paying the 19% rate of corporation tax.

Depending on the circumstances, if a company’s profits lie between £50,000 and £250,000, it may be possible to claim some marginal tax relief to reduce the 25% rate. This can apply if the company’s accounting period is less than 12 months, or if there are associate companies.

Calculating marginal relief on corporation tax

Although marginal relief helps to reduce the total corporation tax payable where a company’s profits fall between £50,000 and £250,000, the way in which it is calculated is based on a complex formula that has the effect of increasing the rate of corporation tax payable on profits falling within the marginal range, to a rate that is higher than 25%.

Effectively, the full amount of corporation tax at the rate of 25% is calculated before marginal relief is deducted. The marginal relief calculations are based on offsetting ‘augmented profits’ against the total taxable profits. According to HMRC, ‘augmented profits’ are the company’s total taxable profits plus exempt distributions from non-group companies. These include dividends, distribution of assets or amounts treated as a distribution on the transfer of assets or liabilities or the repayment of share capital.

Example 1: Marginal relief calculation  

The accounts for XYZ Ltd show total profits (taxable and augmented profits) of £190,000 for the year to 31 March 2024. The company has no associated companies. Marginal relief applies because profits fall between £50,000 and £250,000.

Calculations show that XYZ Ltd is entitled to £900 of marginal relief. This has the effect of slightly reducing the rate of corporation tax payable on all profits by 0.48% to 24.53%.

Therefore, instead of paying 25% on profits of £190,000 (£47,500), the company pays 24.53% of £190,000 (£46,600).

However, if profits were £50,000 the corporation tax payable would be £9,500, at 19%, therefore the corporation tax on profits exceeding £50,000 is £38,000, an effective rate of 26.5%.

Depending on profit levels, it may be worth considering planning opportunities to reduce profits to below the marginal rate limit, such as advancing the purchase of equipment or making pension contributions.

Impact of associated companies on corporation tax

Where a company has multiple associated companies, the upper and lower profit limits for corporation tax purposes will reduce accordingly.

The table below shows how the taxable profit limits for companies with up to five associated companies are adjusted.

For example, if XYZ Ltd as in the earlier scenario had one associated company, its profit limits would change from £50,000 to £250,000 to become £25,000 to £125,000. Since its taxable profits are £190,000, it will pay the full 25% corporation tax rate.

If a company’s accounting period spans the 1 April 2023 new rate start date, profits will be apportioned between those falling within the financial year 2022, which are taxed at 19%, and those falling within the financial year 2023. For the profits in the new tax rate period, the actual rate payable will be dependent on what the upper and lower profit limits are. If this situation could apply to your company, speak with your accountant, or tax advisor to understand the effects.

For help and advice on corporation tax planning and compliance, contact partners@rjp.co.uk.