Introduction:
In the dynamic realm of business taxation, staying ahead of regulatory changes is paramount for enterprises to navigate effectively. The UK's corporation tax has witnessed significant updates in recent times, with alterations to rates and thresholds impacting businesses across the spectrum.
As of 1st April 23, the UK's corporation tax rates have undergone notable adjustments, marking a pivotal shift in the taxation framework. Below will explain the new corporation tax rates and use an example to show you how these changes will affect profits at different levels.
Corporation Tax Rates:
Main Rate:
The main rate of corporation tax has risen from 19% to 25%, however, you will only pay the main rate of corporation tax if your profits exceed £250,000. If your profits are below this threshold then the small profits rate and marginal rate may apply.
Small Profits Rate:
Despite the main rate hike, the small profits rate remains unchanged at 19% for businesses with profits below £50,000. This measure aims to support small enterprises and start-ups, fostering a conducive environment for entrepreneurship and growth.
Marginal Rate:
The marginal rate, which is charged on profits between £50,001 - £250,000 has been increased to 26.5% from 19%.
Example 1:
X Ltd has made a profit of £38,000 that is chargeable to corporation tax.
As the £38,000 profit is below £50,000, the small profit rate is applied, which is 19%
£38,000 x 19% = £7,220
Corporation tax will be £7,220 on the £38,000 in profit.
Example 2:
Y Ltd has made a profit of £232,000 that is chargeable to corporation tax.
As the £232,000 profit is below £250,000, both the small profit rate and marginal rate will come into play.
£50,000 x 19% = £9,500
£182,000 x 26.5% = £48,230
£9,500 + £48,230 = £57,730
Corporation tax will be £57,730 on the £232,000 in profit.
Example 3:
Z Ltd has made a profit of £325,000 that is chargeable to corporation tax.
As the £325,000 profit exceeds the upper limited of £250,000, the main rate will be charged on the whole amount of profit.
£325,000 x 25% = £81,250
Corporation tax will be £81,250 on the £325,000 in profit.
Points to consider:
Apportioned Rates:
The small and marginal rate are apportioned according to the number of companies which are Associated for Corporation Tax. This means that if for example there are 4 connected companies the rates would be divided by 4 for each business.
The limits are also apportioned for short accounting periods.
Ring fence companies:
There are slightly different rates for ring fence companies, companies that make profits from oil extraction or oil rights in the UK or UK continental shelf.
The main rate for these businesses is 30% instead of 25%, with the small rates and marginal rates remaining the same as for a regular business.
Close Investment Holdings Companies:
Close Investment Holding Companies (CIHCs) pay Corporation Tax at the main rate regardless of their level of profits.
Conclusion:
The updated UK corporation tax rates herald a new era of fiscal responsibility and regulatory scrutiny for businesses. By understanding the implications of these changes and proactively adapting their strategies, businesses can navigate the evolving tax landscape with resilience and agility. Embracing a proactive approach to tax planning and compliance is paramount for maintaining financial viability and sustaining growth in an ever-changing business environment.
If you want to discuss this further or require us to help with your accounting needs, please contact us today.
Please note this blog is for educational purposes. The information provided does not constitute financial advice or recommendation and should not be considered as such.
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