The Chancellor has confirmed that the Corporation Tax rate will rise to 25% from April 2023, with a system of tapered relief for companies with profits of between £50,000 and £250,000. How much will this new measure cost you?
3rd March 2021 Budget Update
At today’s Budget, the Chancellor confirmed that the rate of Corporation Tax will rise to 25% from April 2023.
As has now become customary, the Government floated the idea of a potential CT hike via the press to gauge public reaction prior to the Budget.
Interestingly, the exact same suggestion was floated via the same press outlets prior to the November 2020 Budget, although the Corporation Tax rise didn’t materialise on that occasion.
So, what exactly has Rishi Sunak announced?
Details of the 2023 Corporation Tax hike
From April 2023, the CT rate will rise from 19% to 25%, marking a near 50-year downward trend in the main rate of Corporation Tax.
Significantly, a new system of tapered relief will be introduced at the same time, to link the rate of tax suffered to the amount of annual profits generated.
The current 19% rate will apply to companies with profits of £50,000 or below, and different levels of tax will apply to annual profits between £50,000 and £250,000.
Historically, smaller companies were subject to a lower ‘small profits’ rate of tax, although companies of all sizes have paid the same rate of tax since 2015.
What is the impact on contractor companies?
Professional contractor companies have been subjected to more targeted taxation than perhaps any other group of businesses, including:
- IR35 – the year 2000 original, plus upcoming April 2021 ‘off payroll’ add-on. See the history of IR35.
- Dividend tax hike in 2016, which cost the average limited company contractor over £3,000 per year.
- Flat Rate VAT restriction (April 2017) – a £2,000 hit for a typical ‘limited cost’ company.
- Employment Allowance ban – from April 2016, no Employers’ NIC rebate for most limited company contractors.
- The Loan Charge – retrospective taxation on users of certain offshore tax schemes. Ruinous for many caught.
So, how much would a potential rise in Corporation Tax cost, if a Corporation Tax rise is applied universally, to all companies, regardless of size?
How much would a Corporation Tax hike cost your company?
Clearly, if your company generates £50,000 of annual profits, the current 19% rate will still apply in 2023, and if it generates £250,000 or more the full 25% rate will apply.
If your company’s annual profits lie somewhere in between, its total tax burden will be determined by a new system of tapered relief.
Unless you are a very high-achieving contracting company, the chances are that your company’s profits will not hit the higher end of the tapered relief spectrum – the highest rate being 25%, of course.
However, a significant number of small companies will still pay more tax as a result, even if this amounts to just a few hundred pounds per year.
According to the concise Corporation Tax briefing uploaded alongside the rest of the Budget documents today, 70% of companies will not pay more than 19% CT during the 2023/4 tax year, and 10% will pay the full 25%.
You can use our limited company profits calculator to work out how much tax your company will pay during the current (2020/21) tax year.