How will the April 2023 Corporation Tax rise affect small businesses?

From April 2023 onwards, the main rate of Corporation Tax will rise from 19% to 25%. Although the current 19% rate will still apply if your profits are £50,000 or less, your company will pay more tax on profits above this level.

What is Corporation Tax?

All UK companies must pay Corporation Tax on the profits they generate.

The profits of non-incorporated businesses (sole traders, partnerships) are taxed via Self-Assessment, not the Corporation Tax process.

Background to the April 2023 changes

The April 2023 Corporation Tax rise was first announced by the then-Chancellor Rishi Sunak in March 2021.

However, in the 23rd September 2022 ‘mini Budget’, Kwasi Kwarteng announced that the measure was to be scrapped altogether.

Following the strong negative market reaction to the mini Budget, the Government was forced into another u-turn. On 14th October 2022, PM Truss confirmed that the Corporation Tax rise will go ahead – as originally planned.

In this guide, we look at what the new Corporation Tax (CT) regime will look like, and how much more tax small limited companies will pay from April 2023 onwards.

What are the new Corporation Tax rates?

The main rate of CT will rise from 19% to 25%. However, smaller companies will not have to pay the full rate. It depends on your level of profits for each fiscal tax year.

The current 19% rate will still apply – if your annual profits are at, or below a new £50,000 threshold.

The full 25% rate applies to companies with annual profits of £250,000 or more.

Between these two rates, a system of marginal relief will apply.

How will ‘marginal relief’ work between the two rates of Corporation Tax?

The new system of taper relief will be the same as that used for CT in the 2014/15 tax year (the last time marginal relief applied to CT). With this in mind, use the following formula to calculate your CT tax liability:

Let’s use an example annual profit figure of £80,000.

a) Multiply your annual profits by the main 25% rate (£20,000).

b) Subtract your annual profits from the £250,000 threshold (£170,000).

c) Multiply step (b) by the marginal rate multiplier of 3/200 (£2,550).

d) Take away step (c) from step (a) – £20,000 – £2,550 (£17,450).

So, in this example, the CT liability is £17,450. This represents a tax increase of £2,250.

In other words, there will be a 26.5% CT rate between £50,000 and £250,000.

Corporation Tax rise calculator

• The Government has created an online CT marginal relief calculator. You can access it here. This is particularly helpful, as it calculates your CT liability if your company accounting year is impacted by both the ‘old’ and ‘new’ CT tax regimes. Most companies will be.

What about short accounting periods and associated companies?

According to the original CT hike news release;

The lower and upper limits will be proportionately reduced for short accounting periods and where there are associated companies.

So, if you operate more than one limited company, where one company – under the control of the same owners – is controlled by another, the £50,000 and £250,000 thresholds are reduced.

For example, where there are two associated companies, the thresholds are reduced to £25,000 and £125,000. There’s a handy explanation of the new rules here.

You can read a technical explanation of how ‘control’ is defined when referring to associated companies here.

Where can I find out more about the Corporation Tax rise?

You can read the original March 2021 news release here.

In its original impact assessment, the Government expect most companies – around 70% – will continue to be taxed at the current 19% rate.

The measure is expected to raise £18bn per year.  However, going into what is likely to be a pronounced economic downturn, this looks like an optimistic forecast. Lower profits = lower Corporation Tax receipts.

For obvious reasons, we recommend you talk to your accountant if you have any questions about the CT increase – particularly if you are likely to be impacted by the Associated Companies rules.