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The Upcoming 2023 Corporation Tax Changes Explained

Corporation Tax

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Let’s lay down the basics

 

As you will know, companies currently pay corporation tax on their profits at a rate of 19% and have done so for the 2021 financial year which started on the 1st of April 2021. This is regardless of their profits and will remain the same for the 2022 financial year.

 

But hold the phone…

 

Starting from the 1st of April 2023, the rate at which companies will be paying corporation tax will depend on their level of profits.

 

That means there will no longer be a one size fits all approach to corporation tax. The rate of corporation tax, starting from the 1stApril 2023, will increase to 25% for companies whose profits exceed the ‘upper profit limit’ which is set at £250,000.

 

The rate of corporation tax will remain at the current rate of 19% for companies whose profits do not exceed the ‘lower profits limit’ set at £50,000 a.k.a. the ‘small profits rate’.

 

For those companies whose profits fall between the lower and upper limits the main rate of 25% applies and the company is entitled to Marginal Small Companies Relief (MSCR). Once profits reach the upper profit limit, the main rate of 25% will then be payable. Until then this will provide a gradual increase in the rate of corporation tax.

 

If your company is one of those whose profits for between the upper and lower limits your accountant will be able to calculate marginal relief and give you an idea of what you will be paying based on your profits.

 

MSCR tapers the effect of the increased rate in.

 

The MSCR calculation is:

 

(Upper Limit – Profits) x Basic profits/Profits x MSCR fraction

 

where

 

·        Upper Limit is £250,000

·        Basic profits are the companies trading profits/ gains

·        Profits are Basic Profits plus Franked Investment Income (FII is generally Dividends from other companies)

·        MSCR Fraction is 3/200ths

 

There is however a simpler expression on a slab basis, where there is no FII:

Profit Band Marginal Rate
£0 to £50,000 19%
£50,000 to £249,000 26.5%
£250,000 plus 25%

These bands give the same result as the full formula and are easier to use, they also show the truer picture of ‘relief’ in the MSCR entitlement.

 

Don’t forget the lower and upper profit limits are reduced where the accounting period is less than 12 months. They are also reduced when a company has one more or more associates.

Associated companies

 

The profit limits are proportionately reduced to take into account the number of associated companies that the company has, see the table below for details.

No. of associated companies Lower profit limit Upper profit limit
0 £50,000 £250,000
1 £25,000 £125,000
2 £16,667 £83,333
3 £12,500 £62,500
4 £10,000 £50,000
5 £8,333 £41,667

 

Time to plan ahead

 

We’ve outlined some items to consider to reduce the impact of the upcoming changes by planning ahead.

 

●    Consider the impact of associated companies and where the restructuring would be beneficial.

●    Are you in a position to accelerate profits so they are taxable in advance of the 1st of April 2023.

●    When it comes to losses, consider whether it would be beneficial to carry them forward or back. This a choice between later relief -potentially at a higher rate, or earlier relief or repayment at a lower rate.

●    And finally, where the effective rate of corporation tax in the 2023 financial year is more than 19%, consider delaying expenses securing a relief at a higher rate.

 

If you have any questions about your corporation tax return and would like to know more, get in touch with us today for a no obligation chat. Find out how we can help advise you on your corporation tax return by calling us on 01322 555 442 or email us at happytohelp@bluerocketaccounting.comto discuss your needs.

 

The information and data in this article was correct at the time of publishing and every attempt is made to ensure its accuracy. However, it may now be out of date or superseded. Blue Rocket Accounting makes no representation or warranty of any kind regarding the content of this article and accepts no responsibility or liability for any decisions made by the reader based on the information and/or data shown here.

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