What is Corporation tax?

Corporation tax is paid by businesses in the UK, and is calculated on their annual profits, in a similar way to income tax for individuals. The profits of non-incorporated businesses (sole traders, partnerships) are taxed via Self-Assessment, not the Corporation Tax process.

The corporation tax rate has been 19% for all limited companies since April 2016. Prior to this date, the rate varied depending on the company’s profits.

From the 1st April 2023, corporation tax will be changing so we’ve broken down what you need to know.

What are the changes?

Companies will fall into 3 categories:

1. Companies with corporation tax profits under £50k
   These companies will be unaffected by the changes and will continue to pay corporation tax at 19%
2. Companies with corporation tax profits over £250k
   These companies will pay 25% corporation tax on all of their profits
3. Companies with profits between £50k and 250k
   These companies fall within the most complicated bracket. They will pay 19% corporation tax on their profits up to 50k and then an eye watering 26.5% on profits above £50k to £250K

It is important to note that accounting profits are different to taxable profits, with adjustments being made between the two figures, principally to account for fixed assets.

Please note that your companies will be regarded as one entity for determining whether you have exceeded the £50k or 250k thresholds.

Straddling accounting periods

If your year-end is not the 31st March, then your profits will be split on a pro rata basis in the year of change. The first part of the tax year will be taxed at 19% under the old rules and the latter part of the year under the new rules.

Capital allowances will be claimed on a time basis in the relevant period assets were acquired.

Is there anything you can do?

Tax planning is unique to everyone’s particular situation, but you may wish to consider:

• Company pension contributions – this would reduce your taxable profits and it may be possible to reduce the rate of tax you are paying.
• Purchase of an electric vehicle – there are currently very attractive tax breaks for the purchase of electric cars, which means minimal personal tax is paid and full tax relief is available on the purchase of the care and its running costs.
• Capital allowances – careful timing of the purchase of assets could change your tax rates.
• Research & development relief – there are generous reliefs for genuine investment in R&D although we would like to highlight the review HM Government are undertaking into the R&D scheme and tightening of checks ongoing currently by HM Revenue & Customs.

At a glance

From April 2023 onwards, the main rate of Corporation Tax will rise from 19% to 25%, although the current 19% rate will still apply if your profits are £50,000 or less.

If you want to discuss how these changes will impact you, get in touch.