Increased Corporation Tax from 1st April 2023
As you may already know there are some changes taking place in terms of corporation tax rates for the Financial Year beginning 1 April 2023. The main corporation tax rate is increasing significantly from 19% to 25%. Hence, this article aims to highlighting who will qualify for Marginal Rate Relief and Small Profit Rate and who will pay the increased corporation tax.
Small Profit Rate - 19%
Taxable profits below £50K
To begin with, the rate of tax payable will depend on the level of taxable profits for each fiscal year. For smaller companies, or in other words – companies with taxable profits of £50,000 or less will pay corporation tax at 19%. This rate will be used as a 'small profits rate’.
Main Rate, but reduced by Marginal Rate Relief
Taxable profits between £50K and £250K
Any Companies with Profits between the margin of £50K to £250K will pay the increased tax rate of 25%, however this will be reduced by marginal rate relief. This Relief is calculated depending on your profits, it is on a sliding scale the closer your profits get to £250K the smaller the relief.
Main Rate
Taxable profits above £250K
Lastly, companies with taxable profits of £250K or more will pay 25% increased corporation tax rate with no marginal rate relief available.
What is Marginal Rate Relief?
Marginal rate relief allows eligible companies to reduce their rate of tax from 25%, as it provides a gradual increase in tax between small profit rate and main rate. If the accounting period is shorter than 12 months, the rate relief is reduced on a pro-rata basis.
If your company has associated companies, the marginal relief is reduced according to the number of associated companies:
For instance, if your company has 2 associated companies - the lower and upper limits for marginal relief are divided by 3:
- £50K Lower limit divided by 3 = £16,997
- £250K Upper limit divided by 3 = £83,333
It is important to know that not all companies are eligible to claim marginal relief. If your company is a close investment holding company or if your company is a non-UK resident company, then the relief cannot be claimed.
How to Claim Marginal Relief
The upcoming change looks a bit overwhelming, however our software will do the hard work for you! You will just have to fill your company’ figures in the corporation tax return CT600 in your Easy Digital account, then our software will calculate the applicable small profit rate or marginal relief rate percentage of corporation tax for your company.
The tax rise takes effect from the 1st April 2023, if your tax year straddles this date, meaning part of your tax year is in the period before the tax rise takes place, your profits will be apportioned over the period to ensure only the days after 1st April are taxed at the higher rate if applicable.
Other changes that will affect SMEs are the changes to capital allowances with the ending of the super-deduction allowance and if you carry out Research and development, the reduction in the enhancement and tax credit rate.
