According to a press reports over the weekend, the Chancellor is considering hiking the Corporation Tax rate from 19% to 24% to plug the enormous black hole in the public finances. How much will this cost you?
As is now customary, the Government has floated the idea of potential tax increases via the press to gauge public reaction prior to Rishi Sunak’s November budget.
Given the huge cost of the COVID-19 Government support measures, plus the inevitable collapse in Treasury receipts following the economic stagnation since March, the Government will need to raise tens of billions in additional tax.
What is the Chancellor considering?
According to The Telegraph and Sunday Times (paywall), to raise up to £30bn per year in additional tax receipts, the Chancellor is considering raising Capital Gains Tax (CGT) on residential property from 28% to 40% for higher rate taxpayers, and CGT on other asset sales from 20% to 40%.
Most significantly, Corporation Tax may be increased from 19% to 24% – marking an end to the 47-year downward trend in the main rate of Corporation Tax. The ‘small profits’ rate of CT has not risen since 2008 either, although companies all sizes have paid the same rate of tax since 2015.
The pension ‘triple lock’ may also be ditched – this ensures that the state pension rises by the highest of three measurements: inflation, average annual wage increases, or 2.5%.
What would the impact be 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 ‘off payroll’ add-on.
- Dividend tax hike in 2016, which cost the average 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?
A professional contracting company turning over £88,000 per year, with £3,ooo annual business expenses, pension contributions of £500 per month, and paying one director’s salary of £9,500 would pay around £13,200 in Corporation Tax in 2020/21.
If CT rises to 24%, the company in this example would see its tax on profits rise to around £16,650 per year – a rise of £3,450!
You can use our limited company profits calculator to work out how much tax your company will pay during the current tax year.