From the 1st of April 2023, two rates of corporation tax (CT) apply – a main rate of 25% and a small profits rate of 19%. The rules dictating which rate applies to a company in any accounting period can be complex and include a requirement to identify ‘associated companies’. In this article, we’ll help you navigate the new rules so you know exactly where your business stands.
Your Guide To The Corporation Tax Rate Changes
Last year, the CT rate was increased from 19% to 25%, and a small profits rate of 19% was introduced for companies with profits below £50,000 (the lower limit). Additionally, marginal relief was brought in for companies whose profits fall between the lower limit and £250,000 (the upper limit). For some companies, the lower and upper limits will be much lower, and certain companies will be entirely excluded from the small profit rate and marginal relief. Keep reading to understand how these changes will affect your business.
CT Rate Basics
Under the rules in place from the 1st of April 2023, the CT rate a company pays in an accounting period depends on the level of its ‘augmented profits’. Augmented profits are a company’s taxable profits for the period, plus exempt dividends received. If these profits are below £50,000, the lower limit, they will pay the small profits rate of 19%. If a business’s profits are above the upper limit of £250,000, they will pay the main rate of 25%. If their augmented profits fall between the upper and lower limits, they will pay the main rate of 25% less marginal relief. Some companies, including non-UK resident companies and close investment holding companies, are excluded from the small profits rate.
The new CT rates only apply from the 1st of April 2023. Accounting periods which straddle that date have to be split into two notional accounting periods — one ending on the 31st of March 2023 and the other starting on the 1st of April 2023. Only the profits of the second notional accounting period (i.e., the one starting on the 1st of April 2023) will fall within the new rates. The first notional accounting period (ending on the 31st of March 2023) will be taxed at 19% under the old rules.
Associated Companies
The number of associated companies a company has can affect the rate of CT it pays, so it’s important to understand what is and isn’t an associated company. Broadly, two companies will be associated if one has control of the other, or the same person or persons have control of both of them. For tax purposes, a company can be an associated company, no matter where it is resident. That means an associated company can include one that is non-UK resident. The upper and lower limits must be divided by the number of ‘associated’ companies. For example, a company with one associated company will have a lower limit of £25,000 (£50,000 / 2) and an upper limit of £125,000.
Get Greater Clarity
CT is a very complicated area of tax, so it’s always recommended to consult an expert before making big decisions regarding business taxation. If you’re looking for support in understanding the CT rates or any other financial area, get in touch with one of our highly experienced accountants at Digital Tax Matters.