Increase in corporation tax 2023

In just over a year’s time, from 1 April 2023, corporation tax rates are increasing. The higher your profits, the more tax you will pay under the new higher 25% rate rules.

At present, companies pay tax on profits at a single rate of 19%, irrespective of the amounts of profits subject to corporation tax. From 1 April 2023, this elegantly simple process is about to change.

From 1 April 2023:

• Companies will continue to pay tax at 19% if their taxable profits are below a lower profits limit of £50,000. Accordingly, many smaller businesses will see no increase in their tax bills.
• Companies with taxable profits above £250,000 will pay tax at the new mainstream rate of 25%.
• Companies with profits between £50,000 and £250,000 will pay tax at the 25% mainstream rate less marginal relief. Marginal relief smooths the impact of the 25% rate which will be adjusted to gradually increase from 19% to 25%.

Complications if a company is associated with other companies

Unfortunately, companies that have a number of associated companies will suffer a reduction in these £50,000 and £250,000 limits.

The limits are divided by the number of associated companies plus 1. For example, if you have one associated company, the lower limit is reduced to £25,000 and the upper limit to £125,000 – the limits are divided by two. Likewise, if you have four associated companies, the limits are £10,000 and £50,000 – the limits are divided by five.

A company is an associated company of another company if one of the two has control of the other or both are under the control of the same person or persons.

Reviewing company structures

You may want to review your company structures prior to 6 April 2023. For example, if you have one company with taxable profits of £40,000 and one company with taxable profits of £5,000, the company with the taxable profits of £40,000 will not benefit from the small profits rate as the profits are above the lower limit of £25,000 that applies to a company with one associate.

Merging the companies will mean that there is only one company and the combined profits of £45,000 will be charged at the small profits rate of 19%.

Planning ahead

With this dramatic change in Corporation Tax rules, for UK companies, now is the time to be planning ahead for the increase to corporation tax.

There are various tactics that can be considered, such as super deductions which means that until 31 March 2023, you can considerably reduce your corporation tax bills by investing in qualifying plant and machinery assets.

Those who invest will benefit from a 130% first-year capital allowance that will effectively cut your tax bill by up to 25p for every £1 you invest.

Limited companies will also benefit from a 50% first-year allowance for investing in qualifying special-rate assets, including long-life ones.

Time for a review?

If you have a number of associated companies, you may want to consider your options. As with all our posts, please note that this information is only a general guide and your personal circumstances may differ.

Professional advice is therefore recommended to ensure you are getting the best possible guidance. If you would like to discuss further, please don’t hesitate to contact us.