Limited Company – Tax rates discussed

New Corporation Tax Rates

The corporation tax rate has changed for the first time since 2017. The previous corporation tax rate was a flat rate of 19% for corporate profits. The increased corporation tax rate came into effect from 01 April 2023, and means that companies will pay tax at 19%, 25% or somewhere in between depending on the level of profit for the year.

Main rate

The main corporation tax rate is now 25%. However, there is some relief for companies with profits under £250,000.

Small profits rate

The small profits rate of 19% is for companies that have profits that are less than £50,000 for the year.

Marginal Tax Rate  

The marginal tax rate is 26.5% on profits between £50,000 and £250,000. The marginal tax rate is applied to give the company an overall effective tax rate somewhere between the 19% and 25% rates, so that there is a gradual increase in the tax rate, rather than a substantial jump.  

Example

A company has profits of £80,000.

Under the old system, these would have been taxed at 19% and resulted in corporation tax of £15,200 being due to HMRC.

Under the new system, the first £50,000 is taxed at 19% totalling £9,500. The additional £30,000 would be taxed at the 26.5% marginal tax rate, resulting in tax due of £7,950.

This would mean that the companies total tax bill under the new system is £17,450, an increase of £2,250. The effective tax rate for the company would be 21.81% (£17,450 of tax divided by £80,000 profit).

Marginal Rate Restrictions

The most common question we are asked is ‘What if I set up multiple companies and spread my profit over these to be at the lower levels?’.

Unfortunately, HMRC has got there first with the Marginal Rate Restrictions, which splits the £250,000 available limit between ‘Associated Companies’. Associated companies are defined as when one company owns another company, or both companies are under the control of the same person/ persons.

If we use the example of £80,000 profit above, with 1 associated company the first £25,000 is taxed at 19% and the remaining £55,000 would be taxed at 26.5%. The corporation tax for the company would be £19,325 or an effective tax rate of 24.16%! 

As limited company structures are harder to unpick and change, this may result in higher tax rates for companies with relatively small profits.

If you are concerned about the increase in the corporation tax rate on your business, please give us a call.