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In recent years, there has been a significant amount of debate surrounding corporation tax rates in various countries around the world. The United Kingdom is no exception, and there are several changes to corporation tax rates set to take effect in 2023. In this blog post, we'll take a closer look at these changes and what they might mean for businesses operating in the UK.
Firstly, it's worth noting that the UK government has been gradually reducing corporation tax rates in recent years, with the aim of making the country a more attractive destination for businesses. In 2010, the rate was set at 28%, but by 2020 it had been reduced to 19%. However, in 2023, the rate is set to increase to 25%.
This increase is part of the UK government's efforts to raise revenue and reduce the budget deficit. The government has argued that the increase in corporation tax will only affect profitable businesses and that small and medium-sized enterprises (SMEs) will not be impacted. In fact, SMEs with profits of less than £50,000 will continue to pay the current rate of 19%, while those with profits between £50,000 and £250,000 will pay a sliding scale reduced rate with companies generating profits above £250,000 paying the full rate of 25%
The method by which the sliding scale of reduced rate is calculated is called Marginal Relief. However, the easier way to understand the tax rates is:
| |
First 50k of profits | 19% |
Next £200k of profits | 26.5% |
Any more profits over £250k | 25% |
However, the biggest worry comes from the extra regulation surrounding Associated Companies. The bandings above are divided by the number of companies which are Associated. Association is deemed to exist if one of the following three situations exist:
1 - The same person owns more than 50% of each company.
2 - The same group of persons collectively owns more than 50% of each company
3 - Dependency - if it can be considered that two companies are financially, economically, or organisationally dependent on the same customers, staff, or money transferring between them.
Dormant companies are excluded from the count.
Therefore, if Mr Jones owns 60% of ABC Limited and 60% of XYZ Limited then both companies will have their bandings divided by two.
| ABC Ltd and XYZ Limited |
First 25k of profits | 19% |
Next £100k of profits | 26.5% |
Any more profits over £125k | 25% |
| |
It is imperative for owners of small companies to plan for the additional tax bills and consider the structures of companies with a view to planning to reduce group sizes where it would be beneficial to do so.
If you would like a Corporation Tax computation prepared in draft for the next financial year based on expected profits, please email us on ES@butlersfinancial.co.uk. Our charges for computations are £125 + VAT for clients of Butlers.
If you would like to find out more about working with Butlers, you can book a free discovery meeting here:
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