From April 1, 2023, there will no longer be a single corporation tax rate for non-ring-fenced company profits.
For most companies, the small profits tax rate will be 19% for profits of £50.000 or less.
For companies with profits in excess of £250.000, the tax rate is increased to 25%. Companies with profits between £50.000 and £250.000 pay the main rate of 25%, reduced by marginal relief. This is to provide a gradual increase in the effective rate of tax between £50.000 and £250.000.
Ring-fenced companies are those that make profits from oil extraction or oil rights. As this is specialized and narrow area, these are not covered here.
It is advised to seek professional advice on how to manage these tax changes as tax is increasing from 1 April 2023. In general, profits should be obtained this year rather than next year to ensure the lowest rate of tax payable is paid. If there is a possibility to increase income or profit this year, steps should be taken to achieve this. Similar with capital gains, they should be achieved this year rather than next year where possible. Additionally, any discretionary expenditure should be deferred until the following tax year to reduce profits in the year when higher tax rates apply. Furthermore, the highest tax rate is payable on profits between £50.000 and £250.000 so this band should be avoidable if possible.
Companies subject to corporation tax with profits over £50.000 are taxed at 25%, but any profits below the £250.000 are reduced through the marginal relief mechanism.
Marginal relief is calculated with the following formula:
(Upper Limit - Profits) x Basic Profits ÷ (Profits x MSCR fraction).
The upper limit is £250,000.
Basic profits are the company’s trading profits and/or gains.
Profits are the basic profits and Franked Investment Income, which is usually dividends from other companies.
The MSCR fraction is the marginal relief corporation tax fraction and is currently 3 ÷ 200.
For example, if a company’s profits are £75,000 and there is no Franked Investment Income, the tax calculation is (£250,000 - £75,000) x (£75,000 ÷ 75,000) x (3 ÷ 200) = £2625.
To calculate this in stages, the following applies.
The upper limit is £250,000.
The taxable profit is £75,000.
The taxable profit including distributions is £75,000.
The MSCR fraction is 3 ÷ 200 = 0.015.
The full calculation is (£250,000 - £75,000) x (£75,000 ÷ £75,000) x (3 ÷ 200) = £175,000 x 1 x 0.015 = £2625.
To calculate the tax due, the corporation tax liability on £75,000 at 25% is £18750, marginal relief is £2625 and corporation tax liability after marginal relief is £18,750 - £2625 = £16,125. This gives an effective tax rate on total profits of 21.5%.
The £50.000 and £250.000 limits are proportionally reduced where the accounting period is shorter than 12 months. These limits are also reduced by the number of associated companies.
If a company has an associated company, the lower limit is reduced to £25.000 and the upper limit is reduced to £125.000. A company is an associated company if one of the companies has control of the other, or both are under the control of the same person or persons.
Non-UK resident companies, close investment holding companies or where profits, including distribution from unrelated and unassociated companies that exceed £250.000 cannot claim marginal relied.
Whilst the tax for profits below £50.000 is 19%, and the rate for profits over £250.000 is 25%, the effective tax rate for profits between £50.000 to £250.000 is 26.5%. If profits are £75.000 the tax can be calculated as £50.000 at 19% = £9500, plus (£75.000 - £50.000) at 26.5% = £6625, which equals in total £16,125.
The effective tax rate for profits between £50.000 to £250.000 is taxed at a high effective rate of 26.5%, higher than the upper rate of 25%. Consequently, it is not tax efficient to have profits between £50.000 and £250.000.
If you require assistance in relation to the above and/or would like to discuss anything further, please do not hesitate to contact firstname.lastname@example.org or your usual A.C.T. contact.