You’re probably well aware by now that the main rate of corporation tax is increasing from 19% to 25% for companies with profits over £250,000 on the 1st of April 2023. Not only this, but from then, the 19% rate will be used as a small profits rate, used by companies with profits of £50,000 or less. Any companies with profits between the margin of £250,000 and £50,000 will pay tax at the main rate, but it will be reduced by a marginal relief. This will lead to a gradual increase in the effective corporation tax rate. 

Ahead of these upcoming changes, it’s a good idea for your company to assess how you will manage the increased rate (should it apply to you). By planning ahead for the financial change, you’re less likely to be caught off guard when April comes around.

My accounting period doesn’t line up with the changes, what does this mean for me?

For companies whose year end is the 31st of March, the changes are quite simple: they will pay 19% corporation tax for the whole of the 2022/2023 period, and then 25% for the whole of the 2023/2024 period. However, companies whose accounting period straddles the 1st of April, a hybrid rate of the two taxes will be applied at 22%. This represents the 19% tax for the proportion of their accounting period leading up to and including the 31st of March, and then 25% for the remaining period. It’s important to base your estimates on this rate, rather than your usual 19% rate. 

Does it matter that my company is an associated company?

Put simply, yes. For associated companies (note: not group companies), the new corporation tax upper and lower rates will be divided by the number of associated companies. This means that if your company is associated with 4 other companies, there are 5 associated companies, reducing the upper threshold from £250,000 to £50,000. Similarly, the lower threshold would be reduced from £50,000 to £10,000.

According to HMRC, a company is an associated company of another, if one of the two has control of the other, or both are under the control of the same person or persons. 

I pay my tax under the quarterly instalment regime, how will the changes affect me?

If your tax payments are made quarterly, you may have already had to adapt your practices to accommodate the upcoming rate changes. Similarly to those with whose accounting period falls outside of the changes, you will face a hybrid rate of corporation tax at first. For example, if your first instalment of tax payments in 2023 is due in January and your year end is in June, you should have based your estimate of payable tax on a 20.5% hybrid rate. 

The above is general advice concerning the upcoming changes to corporation tax. If you have any queries about this topic, please contact a member of the team directly on 020 7625 4545 or email info@mgr.co.uk

Warning: The above is merely general guidance and should not be relied upon as formal advice. The advice we give to each client will depend on their specific circumstances. We suggest you take professional advice before taking any action in relation to the issues discussed above.

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