Business owners may have already heard that from April 2023 onwards, the rate of corporation tax that a company will pay is changing. Our latest blog post from the Freedom in Numbers team covers corporation tax; here we look into what corporation tax is, who needs to pay this and what the changes are coming down the line for this type of tax.
What is corporation tax?
Corporation tax is a form of taxation in the UK paid by limited companies and other types of organisations, including clubs, societies, and associations. The amount of corporation tax a business has to pay is based on the profits that they make each financial year. A tax year runs from 6th April to the following 5th April, so part of the company’s financial year may straddle the old rules and the new incoming changes.
Businesses that meet the requirement are liable to pay this type of tax and must file a corporation tax return each year. The deadline for filing the tax return is 12 months after the end of the financial year, but making a payment is only 9 months after, meaning you pay the tax before the tax return deadline.
You may be wondering how much the UK government raises in corporation tax each year? Well, as a total figure of government revenue, corporation tax forms the largest tax on companies and contributed £40.3 billion to UK government tax receipts, being 4.9% of all UK tax raised in the year 2021 – 2022.
How is corporation tax paid?
As corporation tax is based on profits that a business earns in any tax year, companies can deduct allowable expenses from their total profits during this time. The resulting figure is the company’s taxable profit, and corporation tax is calculated as a percentage of this amount. Our accounting team at Freedom in Numbers have prepared a useful guide of the expenses you can and can’t claim on your corporation tax return if you require more advice on what is an eligible business expense.
There are many ways to pay your corporation tax bill to HMRC. Firstly, corporation tax can be paid electronically, but also by post and via a third-party agent. Companies can also make payments on account, which means they pay an estimated amount of corporation tax in advance, based on their previous year’s liability, to spread the cost of their tax bill across the year.
The current corporation tax rate in the UK is 19%, but this is set to change very soon.
What are the changes to UK corporation tax in 2023?
All companies and unincorporated associations liable to pay corporation tax will be impacted by the planned changes, which are due to take effect from the 1st of April, 2023. However, the changes that are due to take place differ depending on what your business profit level is.
Almost all businesses that pay corporation tax in the UK are subject to these changes, except for a small number of companies that engage in oil extraction, which are taxed under slightly different corporation tax rates.
- Companies with profits under £50,000 will see their corporation tax remain at the current rate of 19%
- Companies with profits over £250,000 will see their corporation tax increased from 19% to 25%
- Companies with profits between £50,000 and £250,000 will pay tax at the main rate, reduced by a marginal relief which is a gradual increase in the corporation tax rate, which sounds complicated, doesn’t it?
My company makes between £50,000 – £250,000 profit per tax year; what will my corporation tax level be?
Many small businesses will find that their profit level sits between the two corporation tax rates of 19% for profits under £50,000 and 25% for profits over £250,000. So how will this new system work for businesses that fall in between these two levels?
In this case, your business corporation tax will gradually increase in line with profit generated until your profit reaches the £250,000 level, which is applicable to the corporation tax rate of 25%. This is known as Marginal Relief for Corporation Tax.
A general example to show how this will increase is demonstrated below:
Profits – Effective CT %
£50,000 – 19%
£75,000 – 21.50%
£100,000 – 22.75%
£150,000 – 24%
£200,000 – 24.63%
£250,000 – 25%
But if these figures seem confusing for you, then don’t worry. Your accountant will be able to work the rate that you will pay out for you.
For businesses whose profits fall in between these two categories, you can also work out how your corporation tax rate will increase in line with marginal relief by using HMRC’s calculator for corporation tax marginal relief.
To get started with this calculator, you will need to know your company’s accounting period start and end dates, total taxable profit and how your company is structured.
Why are these changes in corporation tax taking place?
In short, this change is being brought in to increase the taxes that companies pay into the government’s coffers. There are some background events to consider with this increase, as it wasn’t always due to go ahead.
The change in the rate of corporation tax was first announced by Rishi Sunak when he was Chancellor in March 2021. This measure was proposed to be dropped by the then Chancellor Kwasi Kwarteng in September 2022; however, after a strong negative market reaction, the proposal to drop the increase was reversed, and the then Prime Minister Liz Truss decided that this increase would go ahead as initially planned.
Overall, the measure is designed to raise revenue whilst keeping the UK’s corporation tax level competitive in relation to other major world economies whilst excluding the least profitable businesses from any tax increase.
Is it best to have an accountant help me with my business corporation tax?
Both small and large business owners find it helpful to work with an accountant to manage their corporation tax obligations. An accountant can advise on tax planning, help with filing tax returns, and ensure that your company meets its tax obligations on time and accurately.
An experienced accountant, like our team at Freedom in Numbers, can also help your business to identify allowable expenses, deductions, and tax credits that they may not be aware of, which can reduce your corporation tax liability. Additionally, having an accountant manage your corporation tax can help free up your time and allow you to focus on what you do best, which is running your business.
An accountant can be a smart investment to ensure you meet your tax obligations while minimising your tax liability. Contact our team today if you need help with your business corporation tax.