For the financial year 2021, which started on 1 April 2021, companies pay corporation tax on their profits at a rate of 19%, regardless of the level of those profits. This remains the case for the financial year 2022.
However, new rules come into effect from 1 April 2023 which will see some companies face a 32% increase in the rate of corporation tax paid, from 19% to 25%.
Within a few months, companies will start to enter accounting periods that will span 1 April 2023, so it is important to be aware of any increased corporation tax exposure and potential opportunities to mitigate this.
The new regime
From 1 April 2023, there is no longer a “one size fits all” approach to corporation tax, and the rate at which companies pay corporation tax will depend on the level of their profits.
The main rate of corporation tax will increase to 25% for companies whose profits exceed the “upper profits limit” of £250,000. Companies whose profits do not exceed the “lower profits limit” of £50,000 will pay corporation tax at the “small profits rate” which will remain at the current corporation tax rate of 19%.
Companies whose profits fall between the lower and upper profit limits will pay corporation tax at the main rate, as “reduced” by marginal relief. This provides a gradual increase in the applicable rate of corporation tax as profits increase until the main rate of 25% is payable once profits reach the upper profits limit, but in effect companies will pay tax at the rate of:
- 19% on the first £50,000 of profits;
- 25% on profits in excess of £250,000; and
- 26.5% where profits fall between £50,000 and £250,000.
Where a company’s accounting period spans 1 April 2023, the profits are apportioned to those falling within the financial year 2022, which are taxed at 19%, and those falling within the financial year 2023, taxed at the appropriate rate depending on the level of profits falling into that year, with the upper and lower profits limits being proportionately reduced.
The upper and lower profit limits are also proportionately reduced where a company’s accounting period is shorter than 12 months and/ or where a company has one or more associated companies.
Practical tips
There is still time to plan to mitigate the impact of the changes, for example:
- If possible, where profits exceed the lower profits limit, accelerate profits so that they are taxable in the financial year 2021 or 2022, rather than after 1 April 2023.
- Where the effective rate of corporation tax after 1 April 2023 is more than 19%, delay expenses to secure relief at a higher rate.
- Where losses are made, consider whether it would be more beneficial to carry them forward rather than carrying them back – the trade-off is between later relief potentially at a higher rate versus earlier relief but at a lower rate.
- Make the best possible use of available corporation tax reliefs, including capital allowances, R&D tax credits and the patent box regime.
- Reconsider profit extraction strategies, factoring in increases in the rate of corporation tax, national insurance, and the new Health & Social Care Levy.
- Consider the impact of associated companies and whether restructuring corporate groups would be beneficial.
- Consider whether ending an accounting period early at 31 March 2023 would be beneficial.
Please get in touch with your usual Ryecroft Glenton contact on 0191 281 1292 if you would like to discuss any of the above in further detail.
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