Getting ready for a 25% company tax rate

The main rate of corporation tax is set to rise from 19% to 25% with effect from 1 April 2023. Tax planning will be necessary to manage cashflow and mitigate the impact of the marginal rate of up to 26.5%

Getting ready for a 25% company tax rate
Photo by LECHAT Valentin / Unsplash

You will no doubt have seen all the flip-flopping over the planned increase in the corporation tax rate from its current 19% rate to 25% from 1 April 2023.

(Rishi Sunak announced it as Chancellor and then Kwasi reversed it and then Jeremy Hunt reinstated it...)

We're now getting close to 1 April and so for companies with 31 March year ends, this is your final year at the current 19% rate - from next year your cashflow forecasts will have to start factoring in a 25% rate (or possibly more).

It's practically a third more in company tax payable than we're used to in recent years.

(That's before you factor in NIC hikes etc.)

This company tax increase will have a significant impact on cashflow

(especially when other cost increases are factored in such as wages, interest, rent, energy etc.)

For companies with, say, a 31 December accounting period end, there will be a blended tax rate i.e. the first 90 days up to 1 April calculated at 19% and then the remainder at 25%. So an effective rate of corporation tax of 23.5% on any taxable profits for the year for the year ended 31 Dec 2023. You can work out the effective rate for your particular accounting period month end (or reach out for help).

Of course, it would be far too simple to refactor the rate to 25% across the board...

So instead, there are actually three corporation tax rates (stay with me!):

  1. Taxable profits up to £50,000 - 19%
  2. Taxable profits between £50,000 - £250,000 (marginal rate) - 26.5%
  3. Taxable profits over £250,000 - 25%

The marginal relief rate band (point 2) involves a complex calculation related to the 'taxable profits' calculation that also takes into account associated companies. The purpose of the latter point is to stop cunning business owners from setting up say 5 companies each with up to £50,000 in company profits to stay at the lowest rate!

The 'eagle-eyed' amongst you will have noted the 26.5% effective rate of tax on profits between £50k-£250k - that's higher than the headline rate! Welcome to the world of 'marginal relief'. The idea is to bring in a gradual increase in the corporate tax rate, but it can result in a higher rate than the main new tax.

Managing profits around the 'marginal relief rate band' will be a key planning point - stay tuned.

There are some levers that we can shift around to help mitigate the impact of these changes and manage profits levels. We will cover some of these tax planning ideas over the coming days.