16 Feb 2023

Everything you need to know about corporation tax increases

For UK companies, one of the biggest taxes to be planning ahead for is the increase to corporation tax, which is yet another Covid consequence. The deficit caused by the pandemic has put considerable pressure on the Chancellor to claw back some of the cash that was splashed, with Government debt in the UK reaching over £2.1 trillion in 2020/21.

Corporation tax was always going to be in the firing line and it didn't come as much of a surprise when Rishi Sunak announced last year a change to the corporation tax rates, to be effective from 1 April 2023. He's hoping the increase will boost revenues for the government to the tune of £11.9 billion in 2023/24.

It's crucial for businesses to start planning now for these changes. Many will be able to take measures to soften the blow, but even if they can't, forewarned is forearmed, and being aware of the changes and whether you will be affected will keep you one step ahead of the game and save you money.

What are the changes?

At the moment, the majority of companies, regardless of the size of their profits, suffer corporation tax at the rate of 19 per cent and this will continue to be effective until 31 March 2023. After this date, a new main rate comes into effect for companies with profits over £50,000.

They will face a corporation tax rate of 25 per cent - a significant increase. All companies with profits below £50,000 will continue paying the 19 per cent rate of corporation tax. Businesses earning profits between £50,000 to £250,000 will receive marginal tax relief, which was last heard of about a decade ago.

Bear in mind that close investment companies may be subject to the 25 per cent rate of corporation tax irrespective of the profit level! The main rate of 25 per cent applies unless at least one of the three exclusions are met, namely the company is; a trading company, a property investment company or a service/holding company. For popular Family Investment Companies investing in the stock market, the rate will therefore be 25 per cent, although a well-planned investment portfolio will help minimise the impact.

What does it mean for your business?

Any extra tax will obviously have an impact on cash flow for starters, and it will also reduce your net profit figure. If you have historically been remunerated by dividends, it is worth considering how you remunerate yourself from your business going forward, as the difference between dividends and salary has reduced.

But of course, paying more tax also means you will gain more benefit from any relief available, so it's critical that you are claiming everything you are entitled to, including incentives such as Research and Development tax relief and Patent Box. There is still almost a year until the corporation tax rate rise comes in and time is your friend in situations like this.

Act now to reduce costs

Here are some of the measures you can consider to deal with the increase in corporation tax rate:

  • Plan your capital allowance claims, consider whether to claim super-deduction, which enables you to claim 130 per cent as a first-year relief on plant and machinery or claim capital allowances in future periods following the increase in corporation tax rate.

  • Think about carrying forward your losses to offset against future profits at the higher rate of corporation tax.

  • Review the structure of your business. If you have semi-dormant group companies then it would be prudent to tidy up the group, as the limits are divided by the number of active associated companies.

  • Make sure you review your remuneration strategy, revisit your salary vs dividends calculations whilst maximising your pension contributions in 2023/24.

Despite the increase announced, the UK will still have one of the lowest corporation tax rates in the G7 countries and it is expected that 1.4m businesses will be unaffected by this change. And lastly, don't forget, 25 per cent is still a competitive rate - it was 52 per cent the year Prince William was born!

Interested in finding out more? Get in touch with our team today