Corporation Tax rise explained and 3 ways to lower your Corporation Tax Bill

With Corporation Tax set to rise in April 2023 we look at the way it could affect your business and look at ways limited company owners can manage their overall bill.

What is Corporation tax and how much do you have to pay

If you own a limited company, you’ll need to pay Corporation Tax on the profits the company makes. Corporation Tax is currently set at 19% in the UK.

Most countries have some form of Corporation Tax, but some territories like Guernsey, The Isle of Man and Cayman Islands do not have any. Which could explain why some multinational companies choose to headquarter themselves in these regions.

Corporation Tax changes.

The rise was first announced by then Chancellor Rishi Sunak, in March 2021. Kwasi Kwarteng’s September 2022 mini budget outlined his plans to cancel the planned rise. Fast forward to the 14th October 2022 and the Government did an unsurprising U-Turn and plans to increase Corporation Tax in April 2023 were back on.

The planned Corporation Tax increase will also see the return of the small profit rate. Once the Corporation tax increase takes effect in April 2023 the applicable corporation tax rates will be 19% or 25%. Businesses with profits of £50,000 or below will only have to pay 19% under the small profit rate.

The full 25% rate applies to those companies with a annual profits of £250,000 or more. If a company’s profits lie between £50,000 and £250,000 it will be possible to claim marginal relief to reduce its Corporation Tax liability

Accounting periods that span 1 April 2023

Companies with a non-March year-end will experience transitional rates. For example, if a company has a June 2023 year-end, 9 months of the year will fall in the old regime and 3 months in the new regime. If the profits are under £50,000 this will mean no change as both rates are 19%

However, if the profits are over £50,000 it will result in a hybrid rate for the whole year which will be higher than the previous rate. In this way, we can see that even though the changes start in April 2023 this could be affecting companies from as early as May 2022.

Corporation Tax increase for Associated Companies

The upper and lower limits for taxable profits are reduced depending on the number of ‘associated companies’, the taxable profit limits being divided equally among all the associated companies.

This means that if there are 2 associated companies they will pay 25% on profits of £125,000 and above (being half of the upper limit of £250,000) and will move out of the 19% rate once the profits reach £25,000 each rather than £50,000.

It is  therefore, extremely important to explore the relationship between companies in which you own shares, the likely profit levels in each and whether action can be taken now to avoid paying more tax than necessary after April 2023.

3 ways you could lower your Corporation Tax bill

1. Consider making an employer pension contribution

Adding money to a pension can help make sure you keep your financial independence whenever you decide to stop working. But if you have your own limited company, it could help you save on tax charges too.

If you are employed by the company, you can make employer contributions to your pension from the company account. Employer contributions are normally regarded as a business expense, so you won’t pay Corporation Tax on the contribution.

Make sure you understand your annual allowance limits first. Most people have an annual allowance of £40,000. HMRC could also question any corporation tax relief if your total salary and benefit package is higher than the work they think you’ve done for the company

2. Claim every business expense

It is important to claim for everything you can when running your own business, however big or small it might be. By claiming your expenses you are reducing your profit, which also reduces how much Corporation Tax you pay.

You can claim for anything from marketing costs, office equipment and travel expenses. As long as the expenses you’re claiming are only for business purposes. Keep records of all expenses, without a record HMRC can refuse to accept your claim

3. Pay your Corporation Tax early

If you are in a position to do so, pay your corporation tax bill early. HMRC will pay some back in the form of interest. Currently they will pay 0.5% from the date you make the early payment, to the payment deadline.

The earliest HMRC will start paying this interest from is 6 months and 13 days after the start of your ‘accounting period’ This is the time covered by your company tax return.

Conclusion

This change to the Corporation Tax  is one of the biggest tax rises to hit companies for years. It will inevitably be a challenging time for many profitable businesses. If you have any questions on the changes or how to reduce your Corporation Tax bill then please get in touch

The Government update on Corporation Tax can be read here

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