How the corporation tax thresholds will impact new business growth
For this blog topic, I thought it would be helpful to run through the recent changes in Corporation tax thresholds which have recently come into effect. These changes are going to affect new businesses a great deal, and we should know how they work.
Corporation tax- Businesses earning under 50k
As of April 2023, the corporation tax rate went from 19% to 25% for businesses earning over £250K in profits. Here’s the good news though: companies that are still making profits under £50,000 will continue to be charged at the lower 19% rate.
The new thresholds have been structured in bands so that smaller companies can be supported while larger ones provide higher input to the economy.
As an example, say we have a brand-new startup that made £40,000 profit in year one. Assuming a 19% rate, their tax liability would be:
Profit: £40,000
Tax Rate: 19%
Tax Owed: £7,600
It leaves them with approximately £32,400 to reinvest in the business such as by employing new staff or branching out into other products. The reason for this is because that lower tax burden is a great incentive for small businesses to expand and innovate.
Corporation tax- Businesses earning over 50k
The opposite would happen if a business began to grow, and its profits generated over £250,000 where it is subject to much higher rate of tax.
Say a company is making £300,000 in profit the tax will be calculated as follows:
Profit: £300,000
Tax Rate: 19% for the first 50k, 25% for the rest (250k)
Tax Owed: £72000
That would mean, after tax, they would now end up with £228000 which is a far larger slice of their returns than is applied to smaller businesses. Entrepreneurs might think twice about growing too fast, for fear the tax would crush them.
Marginal relief
Marginal Relief allows you to make your Corporation Tax rate less than the 25% main rate, so that it increases smoother between the small profits rate and the main rates.
Taxable profits between £50,000 and £250,000 from 1 April 2023 may become eligible for Marginal Relief on behalf of your business or top organisation when its taxable profits are between: £50,000 (the lower limit) and £250,000 (the upper limit).
These limits are reduced proportionately for accounting periods that are less than 12 months in duration. The numbers are also scaled down accordingly by the number of associated companies your company has.
To put it differently, if your business has 3 other related companies, then the limits are divided by four. E.g. The lower limit drops to £12,500 with an upper level of £62,500.
You cannot claim Marginal Relief if:
– You’re a non-UK resident company
– You’re a close investment holding company
– Your profits (including distributions from unrelated, un-associated companies) go over £250,000
You can use the Marginal Relief calculator for Corporation Tax to see how much Marginal Relief you may be able to claim on gov.uk. This service can only be used to calculate Marginal Relief on Corporation Tax profits from 1 April 2023.
As new businesses navigate these changes in corporation tax thresholds, it’s essential to have a solid understanding of how these rates will impact their growth strategies.
At Liburd Gallagher Accountancy, we specialize in helping businesses like yours make sense of these tax implications and optimize your financial strategies.
Whether you’re just starting out or looking to expand, our expert team is here to guide you through the complexities of corporation tax and ensure that you’re making the most of your profits.
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