Date posted: 7th Jul 2021
It was announced at the 2021 Budget, that the corporate tax rate would rise from 19% to 25% from April 2023.
Considering that corporate tax was meant to be cut to 17%, from April 2020 (the cut was scrapped), this represents quite an increase in corporate tax for those businesses operating via a limited company.
However, as a result of the re-introduction of the tiered system (see below), the increase may actually be higher, as there is another rate of 26.5%, which was not announced.
From April 2023, the corporate tax rate will remain at 19% for smaller companies (those with less than £50,000 of taxable profits – remember that taxable profits will differ from accounting profits).
For companies with more than £250,000 of taxable profits, the flat rate of tax will be 25%, on the taxable profit.
In between £50,000 and £250,000, the rate depends upon the level of taxable profits, but will be an effective rate of 26.5%.
So a company with profits of £150,000 will pay tax of £36,000 – £50,000 @ 19% and £100,000 @ 26.5%. This is an effective tax rate of 24%.
In addition, if there are other companies under the control of the company or the shareholders, this may increase the tax charge. For instance if Jack controls Grealish Limited and ICH Limited, then the £50,000 and £250,000 limits are halved (as there are two “associated” companies). So if Grealish Limited’s profits are £150,000, the tax charge is actually worked out as £25,000 @ 19%, £100,000 @ 26.5% and £25,000 @ 25% – £37,500. The more companies owned by Jack, the higher the tax charge will be. In addition, the dates on which the tax payments are due, may be brought forward.
Such a tax rate, will lead to tax planning opportunities, particularly in relation to remuneration/pension planning or perhaps consolidations. It also may lead to more companies considering R&D relief, however, it would not be a surprise to see the rate of R&D tax relief cut, given that it will appear even more generous, after April 2023.
If you wish to discuss any aspect of corporate tax planning, please give us a call.