On the 3 March Budget this year we saw very few tax increases, perhaps unsurprising given we were still in the midst of the second wave of Covid-19. The one increase that did hit the headlines however was to Corporation Tax, with an increase from 19% to 25% from 1 April 2023 for companies with profits over £250,000.
Companies with profits up to £50,000 will see no change and will remain taxable at 19%, while those with profits between £50,000 and £250,000 will pay tax on a sliding scale from 19% to 25% as profits increase.
For companies with profits in this “marginal relief” range, there is a fairly straightforward way to calculate the tax payable. The first £50,000 is taxable at 19%, while any amount between £50,000 and £250,000 will be taxed at a marginal rate of 26.5%.
As an example, a company with £125,000 of pre-tax profit will pay 19% on the first £50,000 plus 26.5% on the remaining £75,000 for a total of £29,375, an overall rate of 23.5%.
The table below shows the effect this has on profits between £50,000 and £250,000.
|Profit||Current rate||Current charge||2023 rate||2023 charge||Extra tax|
Care does need to be taken if there are multiple companies which are part of a group or are under common control as the profits of all such companies are considered when determining the rate each will pay. A group of 5 companies each with £50,000 of profit (£250,000 total) will pay at the 25% rate, not 19%.
This naturally increases the cost of trading via a limited company compared to a sole trader or partnership, but with two years until implementation, might we see a corresponding increase to personal income taxes?