March 15, 2023 Corporation Tax Changes 2023 The rate at which corporation tax is charged on company profits is changing from 1 April 2023 and will no longer be at the fixed rate of 19%. From 1 April 2023 the main rate will be 25% for companies with taxable profits over £250,000. Profits below this level will be taxed at different rates: The first £50,000 of taxable profits will be taxed at 19% Profits between £50,000 and £250,000 will be taxed at 26.5% What are taxable profits? Taxable profits are calculated based upon the profit of the company (normally income less expenses) per the annual accounts and then adjusted for various items to reach the taxable figure. Common adjustments increasing the taxable profits are for add backs of client entertaining and depreciation charges. Conversely, taxable profits can be reduced from the accounting figure for purchases of computer equipment etc. Please note that dividends paid do not reduce the profits of a company for tax purposes. Why is the marginal rate higher than the main rate? The marginal rate of 26.5% on profits over £50,000 ensures that companies are taxed at a gradual overall effective rate up to reaching the threshold of the main rate at profits of £250,000. For example, a company with taxable profits of £100,000 would be taxed as follows: £50,000 @ 19% + £50,000 @ 26.5% = a total tax charge of £22,750 meaning an overall effective rate of 22.75% As we get closer to the £250,000 threshold the effective rate increases accordingly. For example, a company with taxable profits of £200,000 would be taxed as follows: £50,000 @ 19% + £150,000 @ 26.5% = a total tax charge of £49,250 meaning an overall effective rate of 24.63% See below for a table showing the new corporation tax due for certain profit levels – this assumes there are no associated companies (see below section): Associated companies The above rates get slightly more complicated where companies are associated. For tax purposes companies are associated where one company has control of another or both companies are under the control of the same people. It does not matter where the companies in question are resident, or if they were only associated for part of the accounting period. Where there are associated companies the thresholds for the applicable tax rate are divided by the total number of associated companies. This rule does not apply to dormant companies. For example, a director owns 100% of the ordinary share capital of company A which made a taxable profit of £100,000 in the year to 31 March 2024 and is also the holder of 51% of the ordinary shares of company B which made a taxable profit of £50,000 in the same period. In this instance company A and company B would be associated companies for tax purposes and as such the thresholds where each rate of tax begins is divided by 2. The tax calculations for each company would be as follows: Company A £25,000 @ 19% + £75,000 @ 26.5% = a total tax charge of £24,625 – this compares to a tax charge of £22,750 if the company had no associates. Company B £25,000 @ 19% + £25,000 @ 26.5% = a total tax charge of £11,375 – this compares to a tax charge of £9,500 if the company had no associates. As you can see the effect of these companies being associated has led to an increase in the overall tax charge. Short Accounting Periods Where a company has a short accounting period (most commonly in their final period of trading) the thresholds at where the different tax rates are charged are reduced accordingly. For example, a company makes a taxable profit of £50,000 in its short final accounting period that runs from 1 April 2023 to 30 September 2023 (183 days), the corporation tax calculation would be as follows: £25,068 @ 19% + £24,932 @ 26.5% = £11,370. In the above scenario the £50,000 band threshold has been reduced by the fraction of 183 days / 365 days. Accounting periods that straddle 1 April 2023. For many companies they will find that the first time the new rules are applicable to them are for periods that are taxed partly in accordance with the old rules too. An example of this would be a company having a year end of 31 December 2023, if they had a taxable profit of £150,000 the calculation would look as follows: 90 days at the current rules – £36,986 @ 19% = £7,027 plus 275 days of the new rules – £37,671 @ 19% + £75,343 @ 26.5% = £27,124 – a total corporation tax charge of £34,150. Please note that for corporation tax purposes the taxable profits are simply apportioned on a time basis as if they have arisen on a consistent basis throughout the year. Saving corporation tax at the marginal rate For most companies where their taxable profits regularly exceed £50,000 these changes are going to lead to year on year increases in the amounts of corporation tax payable with options fairly limited in avoiding the marginal rate. One option for owner-managed companies to consider would be, where possible, to increase or start to make pension contributions directly from the company. If a company had profits before any pension contributions were made of £70,000 and the company paid £20,000 into the directors pension in that same accounting period this would have the effect of saving corporation tax of £5,300 on that contribution (therefore a net overall cost of the pension contribution of £14,700) meaning all remaining profits are taxed at 19% and avoiding the 26.5% marginal rate completely. We have a separate article in regards to company pension contributions for directors which can be found here Please note that we are not pension advisors so we cannot give specific pension and investment advice. If you are interested in starting a pension, we would strongly advise that you discuss your specific circumstances with a pension advisor. Disclaimer