Corporation Tax charge and rates from 1 April 2023

For UK companies, one of the biggest taxes to be planning for is the increase to corporation tax. The new rate will be effective from 1 April 2023.

– A small profits rate of 19% will apply to companies whose profits are equal to or less than £50,000.

– The main Corporation Tax rate is increased to 25% and will apply to companies with profits more than £250,000.

Companies with profits between £50,000 and £250,000 will pay tax at the main rate of 25% reduced by marginal relief. The marginal relief acts to adjust the rate of tax paid gradually increasing liability from 19% to 25%.

This has been put in place to support the government’s objective to raise revenue whilst keeping the UK’s rate of Corporation Tax competitive relative to other major comparable economies.

This excludes the least profitable businesses from a rate increase.

Calculating marginal relief on corporation tax

Companies that have lower profit limits, set at £50,000, and the upper profits limit, set at £250,000, are able to claim marginal relief. This will provide a bridge between the small companies’ rate of 19%, applying to companies with profits of £50,000 or less, and the main rate of 25%, applying to companies with profits of £250,000 or more.

The full amount of corporation tax at the rate of 25% is calculated before marginal relief is deducted. The marginal relief calculations are based on offsetting ‘augmented profits’ against the total taxable profits. According to HMRC, ‘augmented profits’ are the company’s total taxable profits plus exempt distributions from non-group companies.

The best way to demonstrate this is with an example. If a company has a March 2024 year and has profits of £100,000 the calculation of their marginal relief will be as follows:

• Full rate of tax: £100,000 * 25% = £25,000
• Marginal relief: (£250,000 – £100,000) *3/200 = £2,250
• Total Corporation Tax Payable: £22,750
• Effective Corporation Tax Rate of 22.75%