Changes to the corporation tax rate were first mentioned by then Chancellor Rishi Sunak in March 2021; however, in September 2022, former Chancellor Kwasi Kwarteng delivered a "mini-budget" where the previously mentioned increase to the corporation tax was scrapped. Recently, the UK's current Chancellor, Jeremy Hunt, announced that the corporation tax increase to 25% will go ahead from 1 April 2023.

Who will be affected by the Corporation Tax increase?

The Corporation Tax main rate will increase to 25% from 1 April 2023 for companies with profits over £250,000. A Small Profits Rate (SPR) of 19% will also be introduced from the same date for companies with profits of up to £50,000, ensuring these companies pay Corporation Tax at the same rate as currently.

Where a company has profits between £50,000 and £250,000, a marginal rate of Corporation Tax will apply.

Corporation tax only applies to limited companies. Sole traders and partners pay their taxes via a self-assessment tax return.

What is marginal tax relief?

Marginal tax relief means that as your earnings increase, your tax liability decreases; in other words, as you earn more, the tax on every pound you have to pay will decrease. Therefore, you will pay a higher tax percentage on the first half of your income but a lower percentage on the last part if you are in a higher tax bracket. This decrease in the tax rate on the last part of your income is called marginal tax relief.

The marginal tax rate of corporation tax bridges the gap between the lower and upper limits. The lower and upper limits will be proportionately reduced for short accounting periods of less than 12 months and where there are associated companies.

The effect of marginal relief is that the effective rate of Corporation Tax gradually increases from 19% where profits exceed £50,000 to 25% where profits are more than £250,000.

How to calculate the amount of Corporation Tax to pay?

The amount of Corporation Tax to pay will be found by multiplying your profits by the primary rate of 25% and deducting marginal relief. For the fiscal year 2023, the marginal relief fraction will be 3/200. If you want to check your company's eligibility for marginal tax relief and calculate how much marginal relief you might be entitled to, HMRC offers an online calculator, which can be found at https://www.tax.service.gov.uk/marginal-relief-calculator

For some businesses, it may be advisable to reconsider associated company relationships before April 2023 to avoid partial loss of the lower 19% rate or marginal tapering relief.

If you would like more advice and assistance with the Corporation Tax, please contact us at info@gkaccountingservices.com or call us on 01269 508 081, where we will be more than happy to answer any of your questions.