Corporation tax rate changes

Corporation tax rates changed on 1 April 2023 but what does this mean for your company?

Corporation tax

The new corporations tax rates

Companies with taxable profits up to £50,000, will pay corporation tax at the small profits rate of 19%. Companies with taxable profits above £250,000, will pay corporation tax at the main rate of 25%.

For companies with taxable profits between £50,000 – £250,000 a marginal rate of tax will apply. Within the marginal rate, companies will pay corporation tax between 19%-25%, with the corporation tax rate increasing with profits.

Paying tax at the marginal rate is the equivalent of paying 19% tax on the first £50,000 of taxable profits and then 26.5% on profits between £50,000 – £250,000. As such, tax planning is important, and consideration should be given to surplus profits within the marginal rate band. For example, you may wish to consider purchases of assets or making company pension contributions which will attract tax relief at 26.5%.

Associated companies

A key part of the new rules is that the small profit and main rate profit thresholds are divided by the number of associated companies.

Companies are associated if one company is under the control of the other company or if the companies are controlled by the same person(s). This excludes dissolved and dormant companies.

Example 1

A company is the trading subsidiary of a parent holding company. The company has taxable profits of £150,000 and the parent holding company has taxable profits of £35,000.

As there are two associated companies, the thresholds are divided by 2. This gives thresholds of £25,000 and £125,000.

As the trading company has profits above £125,000, it will pay corporation tax at 25%.

As the holding company has profits between the thresholds, the marginal tax rate will apply.

Example 2

Company A has two directors, who both have separate companies (Companies B & C) where they are sole directors.

Company A has taxable profits of £100,000, Company B has taxable profits of £40,000 and Company C has taxable profits of £20,000.

Company A has two associated companies (B&C), so its thresholds are divided by 3 to give £16,667 and £83,333. Companies B & C only have one associated company each (Company A), so their thresholds are divided by 2, which give thresholds of £25,000 and £125,000 per Example 1.

Company A has profits above £83,333 and will pay corporation tax at the main rate of 25%

Company B has profits between the thresholds and will pay tax at the marginal rate.

Company C has profits below £25,000 and will pay tax at the small profits rate of 19%.

For more information on Corporation Tax see the Government website or if you would like to discuss the new corporation tax rates and how these affect your business in more detail, please contact your local Perrys branch or view our page on Corporation Tax