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From 1st April 2023, the 19% main rate will increase to 25% for companies with annual profits of over £250,000.
Companies with profits of up to £50,000 will continue to be charged at 19%.
Then, an effective rate of 26.5% will be applied to annual profits between £50,000 to £250,000.
From £250,000, Corporation Tax is charged at 25%.
There is an effective tax rate of 26.5% to ensure that those with profits over £250,000 are taxed at 25%, and the marginal rate is properly accounted for. Really what is happening is that Marginal Relief is providing a gradual increase to the Corporation Tax rate, between the small profits rate and the main rate, allowing you to reduce your rate from the 25% main rate.
Here is an illustration:
For example, £60,000 in profits would be calculated as follows:
Previously if it was all charged at 19%, the Corporation Tax liability would have been £11,400, meaning an additional £750 is owed due to the rate increase.
We can consider the Marginal relief as a reduction to the profits charged at the main rate of 25%.
Profits = £60,000
Main Rate at 25% = £15,000
Marginal Relief = (£2,850)
Corporation Tax Due = £12,150.
The Marginal Relief is calculated as (U-A) x N/A x F where U= Upper Limited (£250,000), A = Augmented Profits, N = Taxable Total Profits, A = Augmented Profits and F = Standard marginal relief fraction (3/200). Upper and lower limits are reduced where there is a short period of account or where there are associated companies.
As you can see, when the rate falls between £50,000 and £250,000, it is easier to multiple a percentage of the profit by 19% and 26.5%, rather than applying the formula each time.
To learn more about how to reduce your Corporation Tax bill, read our complete guide.
As above, the rate you pay will depend upon the level of profit your Limited Company has, depending on the number of associated companies (below). For a director - shareholder with one company, you can expect to pay the following liability and rate.
It is estimated that just over 24% of Limited Companies have a March year end. December has slightly less though also around 24%, with the rest of the months having between 3% and 8% of company year ends. This means that the rate change will be relatively straight forward for most companies, that have a March year end.
For the other 76% of companies that do not have a March year end, the profits will be apportioned for the number of days at each.
For example, if your year end is 31st December 2023, 90 days will apply at the current rate of 19% and 274 days will be charged at the new rate of Corporation Tax.
An associated company is where either one company is in control of another, or where both companies are under the control of the same person or persons. 'Control' means having over 51% of the shareholding, however the rights and powers of their associates (such as a spouse, civil or business partners) are taken into account.
The profit limits are reduced proportionally by the number of associated companies.
If you have associated Companies, please let us know as soon as possible, so we can look at how to budget for the rate change and for the next Corporation Tax period, that falls after 1st April 2023.
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