Corporation Tax rising? Don't panic!

The recent Budget announced that Corporation Tax would be going up from 19% to 25% in April 2023 - but only for companies with profits exceeding £250K per annum.

As the Government had promised not to increase VAT, income tax and national insurance and they were lobbied by the Lords and backbenchers to leave Capital Gains Tax and Inheritance Tax alone, it didn't leave them many options.

If you're a smaller company with profits of less than £50K the increase won't affect you and you'll continue to pay 19%. The 25% tax only applies if your company's profits exceed £250K. 

So what happens if you're profits are between £50K and £250K? The technical explanation is complex, but the end result is that, effectively you'll pay Corporation Tax at 26.5%. Before you get over-excited, bear in mind that at £250K you'll pay tax on ALL of your profit at 25%, whereas in that middle ground there are adjustments to bring your tax up to that rate from 19%.

Some changes look like a big deal - but they aren't

The Government has brought in a super-deduction for capital allowances that's applicable until April 2023, in effect it means you get 130% tax relief on capital expenditures - but it only applies if you're going to spend more than £1 million on assets, because that is already covered by the annual investment allowance. 

So if you don't plan on spending more than £1 million on capital assets any time soon then super deduction is irrelevant to you.

It's only if you spend more than £1 million in a year (between now and 2023) that the super-deduction applies. But there's still no rush - as Corporation Tax is going up to 25% so whether you wait until tax relief is 25% and claim the tax relief or spend now and get 130% with the super-deduction, while still paying 19% Corporate Tax - it's not going to make a massive difference.

Keep an eye on your calendar

The annual investment allowance for spending on assets drops from £1 million to £200K per year as of 1^st January. 2022. So if you are planning to spend on bigger assets, it's best to invest before the end of this year - although you will have to prove that the asset is in use within the business to claim the allowance.

The challenge is if your business year end straddles the end of 2021. If your claim falls within 2021, but your business year ends on 31^st January your capital allowance will be calculated as 11 months at £1million (approx. £917K) and 1 month at £200K (approx. £16K), which may make a big difference to the tax you'll pay especially if you make the mistake of buying the asset in January!

It all sounds complicated - because it is! Don't guess or try and work it out yourself, get some expert advice.