Planning for the Corporation Tax Increase in April 2023

For UK companies, one of the biggest taxes to be planning for at the moment is the increase to corporation tax, which will be effective from 1 April 2023.

Currently all companies, regardless of the size of their profits, incur corporation tax at the rate of 19%. It is a historically low rate and will continue to be effective for every company until 31 March 2023.

After this date, here’s what will happen:

From 1 April 2023 the Corporation Tax rate changes to:

• 19% for taxable profits below £50,000 (small profit rate)
• 25% for taxable profits above £250,000 (main rate)

For companies with profits between the small profit rate and main rate (£50k to £250k) there will be marginal relief.

Marginal Relief provides a gradual increase in Corporation Tax rate between the small profits rate and the main rate — this allows you to reduce your rate from the 25% main rate.

Who can claim Marginal Relief?

Your company may be able to claim Marginal Relief if its taxable profits from 1 April 2023 are between:

• £50,000 (the lower limit)
• £250,000 (the upper limit)

We won’t bore you with the complex formulas involved to work out the marginal rates of corporation tax, but the way it is calculated actually means you could end up paying more than the top rate of 25%

If your accounting period is shorter than 12 months these limits are proportionately reduced. These limits are also proportionately reduced by the number of associated companies your company has.

For example, if your company has 3 other associated companies, the limits are divided by 4. The lower limit becomes £12,500 and the upper limit becomes £62,500.

What is an Associated Company?

A company is an associated company of another company if one has control of the other, or both are under the control of the same person or persons. ‘Control’ for this purpose has the same meaning as for close companies.

So for example, if you have more than one limited company then these will be associated and will be caught by this new rule for marginal relief.

It is purely to stop company owners from setting up multiple limited companies to spread the profit and reduce the rate of tax the company pays.

What happens if your financial year end isn’t 31 March?

If a company’s accounting period spans the 1 April 2023 new rate start date, profits will be apportioned between those falling within the tax year year 22/23, which are taxed at 19%, and those falling within the tax year 23/24. 

What can you do now to help reduce profits?

If your current financial year ends after 31 March 23, and you project that your profit levels will fall into the marginal or even highest rate of tax, then it may be worth considering planning opportunities to reduce profits, such as advancing the purchase of equipment (see our blog on the Super Deduction deadline) or making pension contributions.

If you have or will have made losses in your financial year ending on or before 31 March 23 and are considering carrying back those losses to write off against the previous years profit then, providing you don’t need the actual cash from the tax refund, you could consider carrying these losses forward instead. By doing this you could potentially obtain relief at a maximum of 26.5% (marginal rate band calculation) instead of just 19% that you’d get by carrying it back.

For help and advice on corporation tax planning and compliance, contact hi@brooks-accountants.co.uk