The main rate of corporation tax is set to rise from 19% to 25% next April, which former chancellor Rishi Sunak first announced in his Spring 2021 Budget.
It’s a stark contrast to the 2016 Conservative Government commitment to reducing corporation tax to 17% by the 2020/21 tax year, a policy that was backtracked at the start of the COVID-19 pandemic.
Now, with an anxiety to be seen raising revenue and paying off COVID-related debt, the Government is increasing corporation tax but “keeping the UK’s rate competitive relative to other major comparable economies”.
With Rishi Sunak supporting the increase in the Conservative leadership race and Liz Truss opposing it, the future of the increase is in the balance.
Nevertheless, in business it’s best to plan for all eventualities, so here is how you should plan for a higher rate of corporate tax.
Corporation tax in the 2023/24 tax year
The hike will hit companies with non-ring fenced profits above £250,000 from 1 April 2023.
However, to protect the small companies in the UK, a small profits rate will be introduced for organisations with profits of £50,000 or less so they continue paying corporation tax at 19%.
Companies with profits between £50,000 and £250,000 will pay tax at the main rate of 25%, reduced by marginal relief.
Marginal relief allows companies to increase their corporation tax rate between the small profits rate and main rate over time – but only if your company was making profits between £300,000 and £1.5 million before 1 April 2015.
If your company has one or more associated companies, these limits are divided by the total number of associated companies.
Likewise, if your accounting period is shorter than 12 months, these limits are proportionally reduced, meaning that for a six-month accounting period, the lower limit for a single company would be £150,000 and the upper limit £750,000.
Preparing for the tax hike
If you make a corporate profit between £50,000 and £250,000, consider applying for marginal relief, if you are eligible to do so.
However, the way it is calculated is based on a complex formula that might actually increase the rate you pay above 25%, rather than reducing it. Therefore, you should also talk to your accountant about marginal relief to make sure you’re benefiting.
You should also consider making a loss carry back claim, as legislation was introduced in Finance Act 2021 to provide a temporary extension to the rules for trading losses.
This applies to losses incurred in accounting periods ended between 1 April 2020 and 31 March 2022.
These losses can be carried back three years and should be set against profits of the most recent years before you carry them back to earlier years.
You can also bring your loss forward, potentially increasing your relief from 19% to 26.5% where profits fall into the marginal rate band.
However, by bringing a loss forward, you will be effectively reducing your company’s profit for the year, which you must carefully consider in your cashflow forecasts and planning.
Corporate tax planning
Sometimes, it pays to go back to basics, so make sure you’re still claiming all the capital allowances you can – including equipment, machinery and vehicles you use for business purposes.
You can usually deduct the full value of an asset from your profits before corporation tax is applied.
The cost of your company’s running costs, items your company trades, or interest payments and finance costs can also be deducted.
Make sure you’ve fully explored whether your company could claim R&D tax credits – a lot of business owners don’t realise they’re eligible and end up paying more in tax than necessary.
Under the SME R&D relief scheme, a company can deduct 130% of qualifying costs from annual profits in addition to the standard 100% deduction.
All you need to do is make sure your R&D project properly qualifies for tax credits, which the corporate tax planning team at Stapletons can help ensure.