This rate increase has been on the cards for some time, having first been announced in 2021’s Spring Budget.
From April, the UK will have two rates of Corporation Tax for the majority of businesses:
So, which Corporation Tax rate should I apply?
The rate of Corporation Tax companies are subject is determined by their ‘augmented profits’. Broadly, this is Total Taxable Profits plus exempt distributions of a qualifying kind, though it is important to note that it will remain in the company’s total taxable profits which are subject to Corporation Tax.
Those companies with augmented profits over £250,000 will be subject to the 25% main rate of Corporation Tax.
The small profits rate of 19% will apply to companies with augmented profits of £50,000 of less – with the exception of close-investment holding companies and non-resident companies chargeable to Corporation Tax via a permanent establishment.
The Government estimates that the main rate rise will bring in £18 billion a year, the introduction of the small profits will mean that the majority (70%) of businesses will see no increase in the rate of Corporation Tax they pay.
For companies with augmented profits between £50,000 to £250,000, while they are also eligible for marginal relief, which ensures gradual increase in the CT rate between lower and upper limit, reducing the impact of a cliff-edge – and potential steep increase in Corporation Tax.
A company’s upper and lower profit limits must be proportionally reduced in various scenarios, including for short accounting periods and by the number of associated companies.
The transition period
For accounting periods straddling 1st April 2023, it is only profits after 1st April 2023 that are subject to the new rules and the period post 1st April is deemed to be a separate accounting period for these purposes.
AT Magazine has put together a brilliant breakdown explaining how Marginal Relief is calculated. We would highly recommend checking it out! We’ve saved it to our Instagram profile, under the ‘Budget’ highlight.
Information for blog post taken from AT Accounting Technician Magazine, March/April 2023 edition.