The recent announcement by the UK government to increase Corporation Tax (CT) has sent ripples through the business world. From 1st April, the rate of corporation tax is set to raise from the current 19% to 25%. This is in one of the biggest U-turns of tax policy of the 20 years.
For many businesses, from start-ups to multinational corporations, this change in policy will affect how they plan their finances. It’s important to understand how the new rates will work and how businesses can ensure they are prepared.
We will explore why the government are increasing corporation tax, how this will affect businesses, and how to properly plan to maximise growth and financial stability…
What is the New UK Corporation Tax Rate?
Starting on 1st April 2023, the CT rate for UK businesses will increase from 19% to 25%. This is a significant change that will impact businesses of all sizes and sectors.
Small businesses with profits less than £50,001 will continue to pay the current corporation tax rate of 19%. There will also be a tapering system for businesses with profits between £50,000 and £250,000. This will gradually increase the rate of corporation tax.
Businesses who’ve been paying tax will recognise this from the old marginal relief system in place for corporation tax. This system will calculate a tax rate for a company with profits in this bracket, falling between the 19%- 25%. This will ensure that all companies pay a fair rate of tax. An example of this is shown below. It is based on a company with profits of £125,000 and a year-end of 31st March 2024:
| Company profits | £125,000 |
| Corporation Tax @ 25% | £31,250 |
| Less: | |
| Marginal relief (250,000-125,000) x 3/200 | -£1,875 |
| Tax Payable | £29,375 |
| Effective Rate of Tax | 23.5% |
Why is the UK Changing Increasing Corporation Tax?
HMRC has stated that the increase in corporation tax is necessary to help fund public services and support the country’s economic recovery from the COVID-19 pandemic.
They have also noted that the corporation tax rate is currently lower than many other developed countries.
Despite the rise to CT, the UK still has the lowest rate of all G7 nations. By increasing the rate, the government hopes to create a fairer tax system and generate additional revenue to support public services.
How do Associated Companies affect the new rates?
Where companies are associated, the upper limit is split between the companies. Companies are associated when they are under the same control. Therefore, if an individual has two or more companies they have a controlling share in, then these would be associated. It will also be considered associated if the control is made up of more than one individual. For example, a husband and wife who hold two or more companies 50/50 each, would be considered associated as they are under the same effective control. Dormant companies are not considered associated, regardless of the control.
As stated, if the companies are associated then the upper limit is split between them. For example, if two companies are associated then they would each have a limit of £125,000 before paying 25% Corporation tax.
It’s also important that companies who receive rental income from an associated company automatically falls into the 25% higher rate. This is why it is crucial to plan ahead in order to not fall into any the traps mentioned. Careful planning can ensure that profits can be raised in the correct company and avoid falling into the higher rate.
How Can Businesses Plan for the New Corporation Tax Rate?
For businesses, the new corporation tax rate will require careful planning to ensure they remain financially stable and continue to grow. Here are a few steps businesses can take to prepare:
Review your current financial situation
Businesses should review their current financial situation and calculate how much the new corporation tax rate will cost them. This will allow them to identify any areas where they can cut costs and make savings.
Evaluate your tax strategy
Businesses should evaluate their current tax strategy. This is to consider whether it needs to be updated to reflect the new corporation tax rate. For example, businesses may need to restructure their operations or consider incorporating in a different jurisdiction to take advantage of lower tax rates.
Take advantage of available tax reliefs
HMRC offer a range of tax reliefs for businesses, including research and development tax credits, capital allowances, and patent box relief. Businesses should ensure they are taking advantage of these reliefs to minimise their tax liability.
Consider the impact on cash flow
The new corporation tax rate will increase the amount of tax businesses have to pay, which could impact their cash flow. Businesses should ensure they have sufficient cash reserves to cover any additional tax payments.
Seek professional advice
Businesses should seek professional advice from their accountant or financial advisor to ensure they are fully prepared for the new corporation tax rate.
How Can Nordens Help?
With Nordens expert accountants, strategic advisors, and tax experts, we can help your business maximise your profitability, and tax planning. Whether that be formulating a structured finance and tax strategy which considers all of the available tax reliefs, or co-ordinating a method to boost your cashflow via funding or investment, we’re here to assist you in any way we can.
If this sound of interest, then why not give us a call or WhatsApp us on 020 8530 0720 and we can go through your options in more detail.
In conclusion, the new corporation tax rate will require businesses to carefully plan their finances and tax strategies. By reviewing their current financial situation, evaluating their tax strategy, taking advantage of available tax reliefs, considering the impact on cash flow, and seeking professional advice, businesses can ensure they remain financially stable and continue to grow in the face of this significant change in policy.
We hope this has outlined to you the new rates of Corporation Tax, and ways to effectively plan your finances in line with this. If you’d like to know any further information on anything mentioned, or anything accounting related for that matter, please do not hesitate to get in contact with us at Nordens, where one of our trusted advisors would be happy talking you through your query.
