The main rate of corporation tax is due to increase to 25% for the financial year 2023, starting on 1 April 2023. However, companies with profits of £50,000 or less will continue to pay corporation tax at the current rate of 19%. Companies whose taxable profits fall between £50,000 and £250,000 will pay corporation tax at the main rate of 25%, but will receive marginal relief which will reduce the effective rate of tax that they pay. Details of the proposed changes can be found in a policy paper published by the Government.
The rate of corporation tax will remain at 19% for the financial year 2022, starting on 1 April 2022.
Small companies’ rate from 1 April 2023
A small companies’ rate of 19% will apply from 1 April 2023 to companies with taxable profits of £50,000 or less. This limit is reduced if the company has associated companies or if the accounting period is less than 12 months.
Marginal relief from 1 April 2023
Companies whose profits fall between the lower profit limit, set at £50,000, and the upper profits limit, set at £250,000, are able to claim marginal relief. This will provide a bridge between the small companies’ rate of 19%, applying to companies with profits of £50,000 or less, and the main rate of 25%, applying to companies with profits of £250,000 or more. The effective rate of corporation tax on profits falling between these two limits will increase gradually. The limits are reduced to reflect the number of associated companies that a company has, for example, being divided by 2 where a company has one associated company. The limits are also proportionately reduced where the accounting period is less than 12 months.
The marginal relief fraction is set at 3/200. The amount of marginal relief is found by multiplying the fraction by the difference between the company’s profits and the upper profits limit of £250,000. For example, if a company has taxable profits of £100,000, they would be entitled to marginal relief of £2,250 (3/200 x (£250,000 – £100,000)).
The calculation is modified if the company has franked investment income.
Where a company’s profits fall between the lower and upper profits limits, their corporation tax liability is found by multiplying their profits by the main rate of 25% and deducting marginal relief. Thus, a company with profits of £100,000 for the year to 31 March 2024 would pay corporation tax of £22,750 ((£100,000 @ 25%) – £2,250). This gives an effective rate of corporation tax of 22.75%.
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