The Government 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?
Scroll down for examples of how much this tax change will cost your limited company.
‘Mini Budget’ reversal, followed by re-instatement
In his 23rd September 2022 ‘Mini Budget’, Kwasi Kwarteng, the then Chancellor, announced that the planned April 2023 Corporation Tax rise would be scrapped.
However, the Government subsequently performed a dramatic u-turn on 14th October 2022, and announced that the CT rise will go ahead, after all:
The decision has been taken in recognition of the need to ensure the UK’s economic stability and reassure markets of its commitment to fiscal discipline, after elements of September’s Growth Plan went further and faster than markets were expecting.
The measure is expected to raise approximately £18bn per year.
The current Chancellor, Jeremy Hunt, is expected to provide more details about this, and other measures in a Medium-Term Fiscal Plan on 31st October 2022.
Original 3rd March 2021 Budget Announcement
At the March 2021 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 did Rishi Sunak originally announce, in 2021?
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 marginal 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 marginal (tapered) relief 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.
How much will the 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 marginal 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 main 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 original March 2021 Budget documents, 70% of companies will not pay more than 19% CT during the 2023/4 tax year, and 10% will pay the full 25%.
Corporation Tax increase – some examples
If we assume that the new system of marginal relief mirrors that used in the 2014/15 and previous tax years, the calculation is as follows:
Step 1 – mutiply your annual profits by the main 25% rate.
Step 2 – subtract your annual profits from the upper threshold (£250,000)
Step 3 – multiply the result of Step 2 by the marginal rate multiplier (3/200)
Step 4 – subtract the result of Step 3 from Step 1 – this is your CT liability for the 2023/4 tax year.
Example 1 – £60,000 annual profits
Step 1 – £60,000 x 25% = £15,000
Step 2 – £250,000 – £60,000 = £190,000
Step 3 – £190,000 x 3/200 = £2,850
Step 4 – £15,000 – £2,850 = CT liability of £12,150 (an increase of £750 on the previous tax year)
Example 2 – £100,000 annual profits
Step 1 – £100,000 x 25% = £25,000
Step 2 – £250,000 – £100,000 = £150,000
Step 3 – £150,000 x 3/200 = £2,250
Step 4 – £25,000 – £2,250 = CT liability of £22,750 (an increase of £3,750 on the previous tax year)
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.
This latest tax increase is yet another burden to be borne by the UK’s smallest companies.
You can use our limited company profits calculator to work out how much tax your company will pay during the current (2022/23) tax year.