The pandemic has had a significant effect on public finances, with the Government spending more than £370 billion on its financial response to COVID-19, which is why Corporation Tax is set to rise.
When will Corporation Tax rise and by how much?
From April 2023, the Corporation Tax rate will increase for all companies that have profits exceeding £50,000.
Businesses should be aware though, that the new higher rate of Corporation Tax will not be the same for all companies and will be calculated based on how profitable they are.
Companies generating profits of £250,000 or more will see their Corporation Tax rates rise from the current 19 per cent to 25 per cent.
Meanwhile, those with profits between the £50,000 and £250,000 thresholds will receive marginal relief, which means that their effective rate of Corporation Tax will increase with their profits to a maximum of 25 per cent.
Companies with profits of less than £50,000 will continue to pay Corporation Tax at 19 per cent under the new small profits rate (SPR).
The new Corporation Tax thresholds are adjusted for companies with accounting periods that are shorter than 12 months and where a company has associated companies.
How will Corporation Tax be calculated?
For those above and below the thresholds, the calculation will be simple. However, those affected by marginal relief will have to use a fraction (set at 3/200) to calculate how much they owe.
The amount of marginal relief is calculated by multiplying the fraction by the difference between the company’s profits and the upper profits limit of £250,000.
The reforms to Corporation Tax will require careful calculations based on various criteria, which could vary from one year to the next, depending on a company’s annual profits.
This additional layer of complexity is why businesses must seek professional advice as soon as possible so that their tax and accounting processes are prepared for this change.
For more information about the Corporation Tax rate rise and how it may affect your business, please contact your Seymour Taylor representative today or email enquiries@stca.co.uk or call 01494552100.
This blog is for guidance only, professional advice should be obtained before acting on any information contained herein. The information was correct at the time of publishing 26 August 2021.