Marginal Relief for Corporation Tax
Since April 2023, the number of companies that your company is associated with may have increased, resulting in paying a higher rate of tax on your profits and paying the tax more regularly. The corporation tax rates brought in mean that more profitable companies pay tax at a higher rate.
The Corporation Tax Rate
From 1 April 2023 the Corporation Tax Rate changes to:
- 19% for taxable profits below £50,000 (small profit rate)
- 25% for taxable profits above £250,000 (main rate)
The profits that fall between £50,000 and £250,000 are subject to an effective CT marginal rate of 26.5%.
There is often a misconception with the CT marginal rate, as most of the time you will not get taxed more than the main rate of 25%. As your taxable profits increase and get closer to £250,000, your overall effective rate of CT will increase up to a maximum of 25%.
The more associated companies you have, the more the thresholds get adjusted and divided by the number of associated companies. In effect, you have lower thresholds meaning that you will have more of your associated companies taxed at a higher rate, the 26.5%, but due to raising the overall corporation tax, you will be paying closer to 25% as the thresholds have been adjusted.
The below examples have been created to show the band or ‘slice’ of profits and the CT rate in effect.
Examples
The following examples assume each company or companies has or have Total Taxable Profits (TTP) of £75,000.
Example 1 – No Associated Companies
| Rate | Profit bands | TTP | CT Rate | CT | Effective CT Rate |
|---|---|---|---|---|---|
| Small profits rate | 0 – 50,000 | 50,000 | 19% | 9,500 | |
| Marginal rate | 50,001 – 250,000 | 25,000 | 26.50% | 6,625 | |
| Main rate | > 250,000 | Nil | 25% | Nil | |
| 75,000 | 16,125 | 21.50% |
In the above example, the company is a standalone company, i.e., does not have any associated companies, as a result, its profit bands are untouched.
If TTP is below the Main rate profit band, in this case, of £250k, TTP is taxed in ‘slices’ as follows:
- The first £50,000 is taxed at 19%; and
- The next slice of TTP of £25,000 is taxed at 26.5%
CT will amount to £16,125, giving an effective CT rate of 21.5%.
Example 2 – 2 Associated Companies
| Rate | Profit bands (as adjusted) | TTP | CT Rate | CT | Effective CT Rate |
|---|---|---|---|---|---|
| Small profits rate | 0 – 16,667 | 16,667 | 19% | 3,167 | |
| Marginal rate | 16,667 – 83,333 | 58,333 | 26.50% | 15,458 | |
| Main rate | > 83,333 | Nil | 25% | Nil | |
| 75,000 | 18,625 | 24.83% |
In the above example, the company has 2 associated companies, as a result, the profit bands are ‘shared’ equally amongst each associate as follows:
- Small profits rate profit band of £50,000 is shared three ways, each associate is allocated £16,667; and
- Marginal rate profit band of £250,000 is also shared three ways, each associate is allocated £83,333.
If TTP are below the Main rate profit band, in this case, of £83,333, TTP is again taxed in ‘slices’ as follows:
- The first £16,667 is taxed at 19%; and
- The next slice of TTP of £58,333 is taxed at 26.5%
CT will amount to £18,625, giving an effective CT rate of 24.83% for each associate.
If TTP are above the main rate profit band of £250k or as adjusted for the number of associated companies, TTP is simply subject to the full rate of 25%.
Furthermore, it can be seen when comparing both examples, as TTP gets closer to the Main rate profit band of £250k or as adjusted for the number of associated companies, the effective CT rate increases and gets closer to the main rate of 25%.
How we can help
Under the new associated company rules, companies will be required to pay tax at a higher rate and earlier, alongside businesses having to pull together accurate projections of profit to avoid heavy interest charges on underpayments of tax.
If you would like more information on how his could affect you, or ways to reduce your corporation tax liability, please contact a member of the Gravita tax team.
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