Corporation Tax Rates

Action points:

The main rate of Corporation tax for businesses with taxable profits over £250,000 will remain at 25% until the next election.

Planning points:

With the current tiered and often confusing corporation tax rates in the UK, here are some planning points to help small businesses stay on track:

Understand which corporation tax rate applies to you

• Review your profits: Corporation tax now varies by profit levels. For profits up to £50,000, the small profits rate generally applies, with a lower tax percentage. Profits over £250,000 fall under the main rate, and anything in between gets a tapered rate.
• Calculate effectively marginal rate (EMR): If you’re between the £50,000 and £250,000 profit thresholds, your effective tax rate will increase gradually. Knowing this rate can help with planning, especially if you’re close to either threshold.

Plan for quarterly or monthly tax payments

• Set aside funds regularly: With higher or varying tax rates, setting aside funds monthly or quarterly helps avoid cash flow issues when your tax bill is due. Regular tax provisions make it easier to manage payments and avoid surprises.
• Adjust provisions as you grow: If profits are increasing, consider adjusting your tax savings in line with the higher rate. This way, you’re prepared for any tax increase at year-end.

Time expenses and investments wisely

• Invest in the business: Consider making any major purchases or investments in machinery, technology, or training before your tax year ends. These can help reduce your taxable profits and potentially keep you within a lower tax bracket.
• Defer or accelerate income: If you expect profits to change significantly from one year to the next, you might benefit from deferring or accelerating certain income or expenses. Speak with us about legal ways to time income for maximum tax efficiency.

Take advantage of allowances and reliefs

• Use the Annual Investment Allowance (AIA): This allowance lets you deduct the full value of certain qualifying purchases up to £1 million. Using this wisely can help reduce taxable profits, especially if you’re close to the higher tax threshold.
• Consider R&D tax relief: If you’re investing in innovation or research, the R&D tax relief scheme can reduce your corporation tax bill significantly. This is valuable for businesses developing new products, services, or processes.

Plan for the tax rate transition zones

• Avoid unplanned threshold crossings: If your profits are close to either the £50,000 or £250,000 threshold, consider strategies like accelerating expenses or reinvesting in the business to stay within the lower rate if possible. This approach can save significant tax costs in the “tapered” range.
• Maintain long-term profit consistency: Aim to smooth out profit fluctuations to avoid unintentionally crossing into higher tax rates in certain years, which could increase your EMR and overall tax bill.

Reinvest to take advantage of retained earnings

• Use profits for business growth: Retained earnings can be a useful source for expansion, especially if your effective tax rate is lower. Instead of drawing large dividends, consider reinvesting profits for growth or savings in the business.
• Pay dividends strategically: Since dividend income has a separate tax implication, balancing salary and dividends could keep personal and corporate taxes more manageable.

These strategies can help you plan effectively and minimise confusion. Regularly reviewing your business finances and leveraging available reliefs will go a long way in managing corporation tax costs.