All of the UK’s limited companies currently pay corporation tax at 19% on their annual profits, but this main rate will increase from April 2023.
Before the Chancellor delivered his Spring Budget speech back in March, corporation tax was one of a few taxes rumoured to be ripe for reform.
With the UK’s debt spiralling beyond £2.1 trillion in March 2021, Rishi Sunak was (and still is) under pressure to claw back the COVID-19 deficit.
Instead of changing corporation tax with immediate effect for 2021/22, significant changes will commence from 1 April 2023.
How the Treasury intends to go about it involves essentially resurrecting an old corporation tax regime which was revoked in 2015. The 2023 version, however, will feature reductions to both the old lower and upper limits.
By implementing the measure, the Treasury expects to recoup more than £17 billion in 2025/26 tax year, compared to what it collected in 2020/21.
Who will pay the 25% rate of corporation tax?
If your company has annual profits of more than £250,000 from 2023/24, you will have to pay the main rate of corporation tax at 25%.
In reality, only the UK’s largest companies with the biggest annual profits can expect to be affected by this increased tax rate.
This is, however, likely to mean that significantly more companies than in the past will be paying corporation tax at the higher rate.
The current main rate of 19% will live on in the form of the small-profits rate, which will apply to companies with profits of up to £50,000 from April 2023.
Sunak hopes this will “protect small businesses” as the corporation tax changes should only affect around one in three UK companies.
Confusingly for some, the small ring-fence profits rate of corporate tax will also remain at 19% from April 2023.
Corporation tax rate taper
Until 2015, the small companies’ rate of corporation tax applied to profits of up to £300,000, the main rate on profits of £1.5 million or more, and tapered relief was on offer to companies with profits between those two thresholds.
Fast forward to 2023 and that system is being brought back from the dead. Companies with profits between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief.
Specific details on this taper have yet to be published by the Government, but what we do know is this will provide a gradual increase in the effective corporate tax rate of somewhere between 19% and 25%.
Don’t forget that until 31 March 2023, you can considerably reduce your corporation tax bills by investing in qualifying plant and machinery assets.
Investing companies will benefit from a 130% first-year capital allowance that will effectively cut your tax bill by up to 25p for every £1 you invest.
For example, if your company invests £10m in qualifying assets in 2021/22, it could deduct £13m, saving £2.47m in corporate tax. Without the super-deduction, the saving would be £497,800.
Limited companies will also benefit from a 50% first-year allowance for investing in qualifying special-rate assets, including long-life ones.