From 1 April 2023, the main rate of Corporation Tax will change, increasing from 19 per cent, to 25 per cent.
Whilst this sounds fairly simple, it is a little more involved than it first appears, as the exact rate that applies will be dictated by company profits.
For businesses with profits below £50,000 – to be known as the small profits rate – the rate of Corporation Tax will stick at 19 per cent, whilst those with profits exceeding £250,000 will be subject to the main rate of 25 per cent.
However, the above doesn’t account for businesses with profits somewhere in between. This is where ‘marginal relief comes into play.
What is marginal relief?
Marginal relief provides for a gradual increase in the rate of Corporation Tax, between the small profits rate and the main rate.
As profits increase within the range prescribed – £50,000 to £250,000 – there is an effective rate, for most businesses, of 26.5%.
Claiming marginal relief – it isn’t for everybody
If your profits sit somewhere between the lower and upper limits, you can claim marginal relief.
It is worth bearing in mind that if your accounting period is shorter than 12 months, or you have one or more associated companies (companies under common control), the respective limits will be reduced proportionately.
The relief cannot be claimed if you are a non-UK resident company, a close investment company, or if you receive distributions from unrelated companies that push your profits above the £250,000 threshold.
How to calculate marginal relief
Effectively, the full amount of Corporation Tax at the rate of 25 per cent is calculated before marginal relief is deducted. Marginal relief calculations reduce the main rate, but will be effected by other profits (exempt distributions for non-group companies).
Exempt distributions include dividends, distribution of assets or amounts treated as a distribution on the transfer of assets or liabilities, or the repayment of share capital.
HM Revenue & Customs (HMRC) has launched a new online calculator, which is intended to help businesses to understand their eligibility, what they could claim, and what their liabilities before and after marginal relief might look like.
Whilst perhaps useful to begin to get an idea of what the Corporation Tax changes could mean for your business, we would always advocate speaking to your accountant. We will be able to confirm your eligibility for the relief and help you to calculate exactly how much Corporation Tax you owe.
Helping you to understand your tax liabilities…
At George Hay, our team of tax specialists can ensure you are compliant with all your Corporation Tax obligations.
In addition, being business advisers as well as chartered accountants, we can take a closer look at your organisation and support you with careful tax planning, helping you to implement tax-efficient strategies for the future.
To discuss your requirements in more detail with one of our experts, contact us at any of our three offices, in Cambridgeshire, Bedfordshire or Hertfordshire, today.