All change for Corporation Tax

HMRC, in their wisdom, have created a more complex system of Corporation Tax, which goes into effect on 1st April. Instead of a nice straightforward rate applied to the profit your business earned, we've now got a complicated formula to apply!

In essence there are three bands.

  • Up to £50K profit – the tax rate remains at 19%
  • Above £250K – a flat rate of 25% applies

Then there's the band in the middle – for businesses that have generated profits over £50K, but less than £250K. This is where it gets complicated. This is the 'marginal rate' and, technically, the rate that applies to this band is 26.5%. 

Before you start shouting 'that's unfair', take into account that for this band the first £50K will still have a rate of 19% applied – it's only the part between £50K-£250K that will have this rate applied. In effect, it will never total more than 25% for the whole amount.

For example, if your business made a profit of £100K in a year, £50K would be taxed at 19% and £50K at 26.5%. This works out at an overall rate of 22.5%.

This is not a new strategy, more a revival of an old one that was around a decade or so back. 

Here comes the twist!

This is not the end of the complication. There are additional complexities to take into account when you have associated companies.

Q: What is an associated company?

A: One where one company has control of the other, or both are under the control of the same person or persons, e.g. shareholders in common.

If you have an associated company the Corporation Tax formula gets diluted. The bands apply across the companies. In other words, you add the profits together and divide by the number of companies involved – including your main company. Effectively that reduces the amount of profit each company can make before a higher tax rate kicks in.

For example, if your main business generated a profit of £150K in a year and the associated company generated £100K in profits. 

Just in case you thought you might get a little relief if you decide to shorten your tax year to bring it into line with the calendar or financial years or for any other reason, you won't get a full year's allowance. Your Corporate Tax will be calculated pro rata.

The only glimmer of positive news is that the Annual Investment Allowance (which is also calculated based on the number of associated companies as above), is expected to be extended.

Currently at £1m, it was proposed to reduce this back to £200K, but this has not happened and the £1m limit is expected to extend into the 2023-24 financial year.

It this all sounds mind-blowing it's wise to talk to an accountant or call us on 01992 554444 for more information.