Towards the end of 2022, the UK Government announced changes to Corporation Tax rates which became effective from 1st April 2023. It was announced that the Corporation Tax main rate was to increase from 19% to 25%.
The new Corporation Tax rates, effective from 1st April 2023, are as follows:
Small profits rate (companies with profits below £50,000) to remain at 19%.
Main rate (companies with profits above £250,000) to increase to 25%.
Companies with profits between £50,000 and £250,000 will pay the 25% main rate, reduced using Marginal Relief.
For companies with profits between £50,000 and £250,000, Corporation Tax is calculated at 25% and tapered down by applying Marginal Relief. The formula for calculating Marginal Relief is:
MR = (F x (U-A)) x (N/A), where:
F - Standard marginal relief fraction (3/200)
U - Upper Limit (£250,000)
A - Augmented Profits
N - Taxable Profits
Example:
Company ABC Ltd has an Accounting period ending 31/03/2024. ABC Ltd has taxable profits for the period of £80,000. The Corporation Tax liability for the period is calculated as follows:
£80,000 x 25% = £20,000
Marginal relief is then calculated as follows:
MR = ((3/200) x (£250,000 - £80,000)) x (£80,000/£80,000) = £2,550
Corporation Tax liability therefore = £20,000 - £2,550 = £17,450.
It is worth noting that for those with year ends other than March (for example year end of December), Corporation Tax liabilities will be pro rata'd accordingly. For instance, a company with a year end of September will pro-rata profits for October 22 - March 23 (with a CT rate of 19% applicable) and then April - September 2023 (with the new rate above applying to these profits).
The rates/methods may vary depending on company structure also. For instance, Close Companies are not eligible for the small profits rate and will be subject to the main rate of 25%.
For Groups/Associated Companies, the upper limit is divided between the amount the associated companies when calculating the Marginal Relief. For example, if one company is owned/controlled by one other company with commercial interdependence, the upper limit used in the marginal relief calculation will be £125,000 (£250,000/2).