Work out the cost of the April 2023 Corporation Tax rise

In 2021, the then-Chancellor, Rishi Sunak, announced a hike in the main rate of Corporation Tax from 19% to 25% from April 2023 onwards.

The policy was scrapped in Kwasi Kwarteng’s ill-fated September 2022 ‘mini-Budget’, before being re-instated by the Government in October 2022.

The measure is expected to raise around £18bn per year for the Treasury.

So, what does this Corporation Tax rise mean for small limited companies?

We have based our calculations on the original Government news release, and will update this guide if any details change between now and April 2023.

What will the Corporation Tax rate be in April 2023?

On 14th October 2022, the Government confirmed that the Corporation Tax regime will change from April 2023.

• The ‘full’ rate of CT will be 25%, whilst the current 19% rate will become the ‘small profits’ rate.
• The full 25% rate will apply to profits of £250,000 or more.
• The small profits rate of 19% will apply to the first £50,000 of profits.
• Between these two rates, a new system of ‘marginal relief’ will apply (at an effective rate of 26.5%).

How will the marginal relief system work in practice?

A system of marginal relief existed until the end of the 2014/2015 tax year. Tax experts expect a similar system to be re-instated for the 2023/24 tax year.

Assuming the new system mirrors the ‘old’ pre-2015 system, to calculate your CT liability for 2023/4, you should:

Multiply your annual profits by the main 25% rate.

Less

(£250,000 (upper limited) – £Annual Profits) x 3/200 (the marginal rate fraction).

In effect, this means that profits between £50,000 and £250,000 are taxed at 26.5%.

Corporation Tax examples for 2023/4 tax year

1) Profits of £40,000

Your profits are below the £50,000 small profits rate, so you pay the current 19% CT rate.

19% x £40,000 = £7,600

Your CT bill is £7,600 – an effective rate of 19%.

2) Profits of £80,000

Your profits lie between the small profits rate threshold and the main rate threshold.

25% x £80,000 = £20,000

Less

(£250,000 – £80,000) x 3/200 = £2,550

Your CT bill is £17,450 – an effective rate of 21.8%. A tax rise of £2,250 on the previous year.

3) Profits of £150,000

Your profits lie between the small profits rate threshold and the main rate threshold.

25% x £150,000 = £37,500

Less

(£250,000 – £150,000) x 3/200 = £1,500

Your CT bill is £36,000 – an effective rate of 24%. A tax rise of £7,500 on the previous year.

Associated (group) companies – different rules

If you have associate companies, i.e. more than one company under common ownership the new rules become more complicated, and the tax burden more onerous.

Companies are ‘associated’ if

• one of the companies has control of the other.
• both companies have common ownership (by individuals or companies).

To calculate your thresholds if there are associated companies, you should divide the thresholds by the number of companies in the group.

For example, if there are 4 companies in the group, the thresholds are divided by 4.

So, in this example, the lower limit would be £12,500, and the upper limit £62,500.

Further information

As the political situation remains ‘fluid’, further changes could be made to the Corporation Tax rise proposals before they are legislated for via a Finance Act.

We have based the information in this article on the original Government 2021 news release.