From 1 April 2023 the main rate of corporation tax will increase from 19% to 25%. This will impact limited companies with profits over £250,000. A new small profits rate (SPR) will be introduced which will apply to companies with profits up to £50,000. This will remain at 19%. This is the first time we have had different rates of corporation tax since 2015. For any companies with profits between £50,000 and £250,000, a marginal rate will apply, bridging the gap between the small profits rate of 19% and the main rate of 25%.
This means there are important matters for company owners/Directors to consider leading up to this date, if they are going to fall under the main or marginal rate of corporation tax:
DELAY REVENUE EXPENDITURE
If possible, any large revenue expenditure leading up to the effective date, such as repairs and maintenance costs etc., should be delayed until after March 2023. This would mean a greater corporation tax saving, due to the company having lower profits at the higher rate. The same doesn’t apply to capital expenditure however, as due to the current super deduction (allowing you to claim 130% of the cost of qualifying plant and machinery as a deduction from your taxable profits) the effective tax rate that is being saved is 24.7%.
CARRY TAX LOSSES FORWARD
If a taxable loss is made in your final year leading up to the start of April 2023, you should consider carrying the loss forward as opposed to immediately carrying it back (if there are taxable profits to carry it back against). This would delay any potential tax rebate, however, the rebate you receive could be greater if offset against future profits at the higher corporation tax rate.
TAKE PROFITS EARLY
You should consider taking profits early before the higher rate comes into effect. Where possible, ensure that work/projects are completed and invoiced in the year leading up to the tax change. This will mean any tax due will be payable sooner but would be at a lower rate and ultimately a lower cost. You would need to consider, for cashflow purposes, if paying a smaller amount of tax sooner would be beneficial or not.
OTHER TAX EFFICIENT COSTS
Don’t forget other tax efficient expenditure which will become even more important when the corporation tax rate increases. If you have an owner-managed limited company, you should consider making employer pension contributions. These are very tax efficient, as they are deductible for corporation tax for the limited company and can help to build up your personal pension pot.
If you are unsure of how the impending corporation tax rate changes may impact you and your company, and what you can do to lessen the impact, please get in touch and we would be happy to discuss any questions or concerns you may have.