In Budget 2021 it was announced that Corporation Tax was to increase from 1 April 2023. This decision was reversed and then re-instated in the two budgets of Autumn 2023.
What Changed?
In recent years there has been a flat rate of Corporation Tax of 19% regardless of profit level.
From April 2023:
- The main rate of Corporation Tax is 25% for Companies with profits of £250,000 or more – this applies to all profits
- A Small Profits Rate of 19% for Companies with profits of £50,000 or less
- The main rate tapers in between £50,000 and £250,000
However there are some important twists in these rules, and the detail merits attention.
Of course, Corporation Tax doesn’t exist in isolation, so in this article we will look at the impact of the change in the wider context of overall tax liabilities for a small business.
Understanding the Taper – Marginal Rates and Effective Rates
The taper takes a little bit of understanding.
The official expression of the rates are:
- If profits are over £250,000 the Main Rate of 25% applies to all profits – including those below £250,000
- If profits are £50,000 or below the Small Company Rate of 19% applies to all profits
- If profits are between these thresholds then the main rate of 25% applies and the company is entitled to Marginal Small Companies Relief (MSCR) as a deduction from the calculated liability.
Marginal Small Companies Relief
MSCR tapers the effect of the increased rate.
The MSCR calculation is:
(Upper Limit – Profits) x Basic profits/Profits x MSCR fraction
where
-
- Upper Limit is £250,000
- Basic profits are the companies trading profits / gains
- Profits are Basic Profits plus Franked Investment Income (FII is generally Dividends from other companies)
- MSCR Fraction is 3/200ths
There is however a simpler expression on a slab basis, where there is no FII:
| Profit Band | Marginal Rate |
| £0 to £50,000 | 19% |
| £50,000 to £249,000 | 26.5% |
| £250,000 plus | 25% |
These bands give the same result as the full formula and are easier to use, but maybe not as politically friendly as far as the Treasury and Government are concerned.
Bear in mind these are Marginal Rates not Average Rates, for example:
| Example, Profits £100,000 | ||
| Slice £ | Rate % | Tax £ |
| £50,000 | 19.0% | £9,500 |
| £50,000 | 26.5% | £13,250 |
| Effective Rate and Total Tax | ||
| £100,000 | 22.75% | £22,750 |
| So we see an Effective Rate of 22.75% and a Marginal Rate of 26.5%.
The £22,750 is the same result as charging the whole profits at 25% and applying MSCR as legislation suggests. |
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The Effective Corporation Tax rate at various profit levels will be:
| Profits | £50,000 | £75,000 | £100,000 | £150,000 | £200,000 | £250,000 |
| Effective CT % | 19.00% | 21.50% | 22.75% | 24.00% | 24.63% | 25.00% |
This Effective Rate applies to the whole of the profits.
How Does This Effective Rate Impact Dividends?
Dividends from Companies are paid from profits after Corporation Tax – so more Corporation Tax means less Profit to distribute, but the personal Dividend Tax (a form of Income Tax) on dividends will decrease.
Please view our page on Limited Company Taxation for a current analysis of the effective tax rates on dividends combing Corporation Tax and Dividend Tax.
Multiple Companies
Multiple companies present some traps with the new Corporation Tax rates.
Briefly, the £50,000 and £250,000 thresholds are apportioned where there are Associated Companies. This means the Main Rate cuts in at a lower level. The apportionment is on a strict arithmetical basis so for situations where aggregate profits are below £250,000 care will be needed to make sure each company is as close as possible to its peers in terms of profit levels – we will look at this below.
Associated Company Definition
Associated Companies are Companies under common control. The rules around this are complex, but generally they look at different groupings of individuals who control a company, and commonality within those groupings. In practical terms Companies will be associated where:
- They are controlled by the same individual, eg:
- Mrs X owns 100% of A Limited and 100% of B Limited – the companies will be Associated
- Mr Y owns 100% of A Limited and 80% of B Limited – the companies will be Associated
- Mr Z owns 100% of A Limited and 20% of B Limited – the companies will be not be Associated
- They are controlled by the same group of individuals, albeit with differing shareholdings,eg:
- Company A is owned 80% by Mr X and 20% by Miss Y; Company B 45% each by Mr X and Miss Y, and 10% by Mrs Z. A and B will be connected by virtue of Mr X and Mrs Y despite the shareholdings differing
- In some circumstances the rights of family members (spouse and blood relations) are included, where there is a commercial interdependence between two companies. Eg:
- Mr F owns 100% of A Limited, Mrs F 100% of B Limited – If A Limited and B Limited have no commercial interdependence the companies will not be Associated – if there is a commercial interdependence they will be associated.
HMRC looks at commercial interdependence on the following basis:
-
- Financially, eg one company supports the other
- Economically, eg the companies serve the same market, share common customers or benefit each other
- Organisationally, eg common management, premises or equipment
Associated Company Apportionment
Where companies are Associated the £50,000 and £250,000 thresholds are strictly apportioned, eg if two connected companies, then each has a £25,000 Small Profit Rate threshold.
The strict apportionment can cause an anomaly if profits are not equal – in the following examples the aggregate profit is £50,000 but the splits differ:
eg 1 – Companies A and B are under common control and hence Associated. A makes an annual profit of £22,000 and B £28,000. After MSCR for B the respective Corporation Tax liabilities are £4,180 and £5,545, total £9,725
eg 2 – Companies A and B are under common control and hence Associated. A makes an annual profit of £48,000 and B £2,000. After MSCR for A the respective Corporation Tax liabilities are £10,845 and £380, total £11,225. This is £1,500 more than the preceding example despite profits being the same.
eg 3 – Both Companies had profits of £25,000 each. The total profit is the same as the preceding examples, Corporation Tax for each company is £4,750, £9,500 in total.
The takeaways here are:
- Be cautious around the number of companies under common control. As a firm we have noticed a trend in recent years for clients to set up multiple companies – this could cause difficulties with Corporation Tax rates.
- Where there are companies under common control, try and match profits as equally as possible.
- If multiple companies are needed, consider an LLP instead
- Be aware of the business activities of family members if there is a mutual interdependency, or the same markets are served.