About corporation tax in the UK
If you are a director of a company based in the UK, you must pay tax on any profits your company makes. HMRC does not issue any bills or invoices when corporation tax is due. It is a key responsibility for the directors of a company to register for tax, keep accounting records about any profits made and to prepare and submit a company tax return for a tax period.
As accountants, keeping your clients up to date on corporate tax matters can be a challenge.
A company must file accounts with Companies House nine months after the end of its accounting period. However, reporting the tax position of a company and paying any tax due to HMRC have slightly different deadlines. A company must pay any corporation tax or let HMRC know that no tax should be paid within nine months and one day of the end of a company’s accounting period. However, the company tax information, which is reported to HMRC on ‘form CT600’, does not need to be submitted to HMRC until 12 months after the end of a company’s accounting period.
You can see why it’s necessary for the directors of a company to appoint an accountant or tax advisor to ensure the rules set by Companies House and HMRC are followed in full. There are serious fines and penalties for missing any deadlines.
What’s changing from April 2023?
From April 2023, companies in the UK will no longer pay a flat rate of corporation tax (the rate up to March 2023 is 19%).
From 1 April 2023, companies with taxable profits over £250,000 will pay corporation tax at the main rate of 25%. Companies with taxable profits of £50,000 or less will pay corporation tax of 19% and companies with profits between £50,000 and £250,000 will pay tax at 25%, reduced by a marginal relief calculation.
Accountants will need to keep their clients up to date on the changes and will want to advise them to arrange any planned investment or major expenditure in the lead up to April 2023 in a tax efficient way. At the detailed level, accountants will need to understand the impact of the marginal relief calculation on a company’s profits and then communicate that to clients. This is where some basic mathematics is helpful, as shown below.
Corporation Tax payable by companies from 1 April 2023
HMRC has set the following rules to calculate the corporation tax payable by a UK company from 1 April 2023.
| Level of profit | Corporation Tax rate |
| More than £250,000 (upper limit) | Main Rate of 25% applies to all profits reported (including profit below £250,000) |
| Below £50,000 | Small Company Rate of 19% applies to all profits |
| Between £50,000 and £250,000 | Main rate of 25% applies and the company is entitled to Marginal Small Companies Relief (MSCR) using a Marginal Rate Multiplier of 3/200 |
The Marginal Small Companies Relief (MSCR) calculation
The calculation of corporation tax to be paid by a company on profits between £50,000 and £250,000 is subject to some complex rules. The Marginal Small Companies Relief (MSCR) calculation is designed to reduce the impact of the new, higher main rate of corporation tax for smaller companies.
HMRC uses the concept of an ‘MSCR fraction’ (set at 3/200) to taper the effect of the new main rate of tax. The calculation is as follows.
| Step 1 | Multiply the company’s annual profits using the Main Rate of corporation tax (25%) |
| Step 2 | Subtract the company’s annual profits from the £250,000 upper limit |
| Step 3 | Multiply the difference between company’s annual profits and the upper limit (calculated at Step 2) by the MSCR fraction of 3/200 |
| Step 4 | Subtract the Step 3 calculation from the Main Rate calculation at Step 1. The difference is the amount of corporation tax a company must pay. |
A worked example for a company with profits of £100,000 from April 2023
Until March 2023, a company reporting a trading profit of £100,000 would pay tax at the flat rate of 19%, and the amount to pay would be £19,000. From April 2023, the following calculations and rates apply.
| Step 1 | Multiply the company’s annual profits (£100,000) using the Main Rate of corporation tax (25%) | £100,000 x 25% | £25,000 |
| Step 2 | Subtract the company’s annual profit (£100,000) from the £250,000 upper limit | £250,000 less £100,000 | £150,000 |
| Step 3 | Multiply the amount calculated at Step 2 by the MSCR fraction of 3/200. This is the amount of relief the company is entitled to | £150,000 x 3/200 | £2,250 |
| Step 4 | Subtract Step 3 calculation (£2,250) from the Main Rate calculation at Step 1 (£25,000). The difference is the company corporation tax liability | £25,000 less £2,250 | £22,750 |
Up to 31 March 2023, a company reporting trading profits of £100,000 pays corporation tax of £19,000 (£100,000 x 19%). Under the new calculation from 1 April 2023, the company will pay an additional £3,750 in corporation tax (£22,750 less £19,000). The effective tax rate is 22.75%, which compares to the outgoing rate of 19%.
All companies reporting a profit of more than £50,000 will pay more corporation tax from 1 April 2023 and will have higher effective corporation tax rates. Some examples are shown in the table below.
| Profit | £50,000 | £100,000 | £150,000 | £200,000 | £250,000 |
| Tax Payable to 31 March 2023 | £9,500 | £19,000 | £28,500 | £38,000 | £47,500 |
| Tax Payable from 1 April 2023 | £9,500 | £22,750 | £36,000 | £49,260 | £62,500 |
| Additional Tax to pay | 0 | £3,750 | £7,500 | £11,260 | £15,000 |
| Effective Tax Rate | 19% | 22.75% | 24% | 24.63% | 25% |
An alternative, simple calculation approach (not suitable for all companies)
Some accountants advocate using a simple calculation of the effective rate and amount of tax to pay. This uses a marginal rate approach by applying a flat 26.5% to profits between £50,000 and £250,000 as follows.
| Profit | Marginal Corporation Tax Rate |
| More than £250,000 (upper limit) | 25% |
| Below £50,000 | 19% |
| Between £50,000 and £250,000 | 26.5% |
The calculation at various amounts of profit from 1 April 2023 is as follows.
| Profit | £50,000 | £100,000 | £150,000 | £200,000 | £250,000 |
| Profit less £50,000 | 0 | £50,000 | £100,000 | £150,000 | £200,000 |
| Tax Payable on first £50,000 of profit at 19% | £9,500 | £9,500 | £9,500 | £9,500 | £9,500 |
| Tax Payable on profit above £50,000 at marginal rate 26.5% | 0 | £13,250 | £26,500 | £39,750 | £53,000 |
| Tax to pay | £9,500 | £22,750 | £36,000 | £49,250 | £62,500 |
| Effective Tax Rate | 19% | 22.75% | 24% | 24.63% | 25% |
The amount of corporation tax to pay and the effective tax rates are the same under either calculation.
The simple calculation approach is not suitable for all types of companies. Companies reporting franked investment income (usually dividends from other companies) will need to add this amount to basic profits.
How Initor Global can help with your corporation tax work
At Initor Global we have accountants and tax specialists who can meet your outsourcing needs. Our experts can prepare your clients annual accounts, company tax returns and calculate any tax due to ensure all deadlines are met.
If you want to find out more about our accountancy and tax services, or arrange a free consultation, please contact us on hello@initor-global.co.uk or visit our website at initor-global.co.uk.
You can also call us on 0203 519 2121.
|
Disclaimer This blog draws on information published by HMRC and other professional bodies. It is not a complete guide to corporation tax. Information may be subject to change and Initor Global accepts no responsibility should you decide to rely on the information we have published in this blog. Professional advice should always be taken as necessary based on your individual circumstances. |
Book a Meeting