Corporation tax set to increase
In the 2023 Spring Statement, the government announced there would be some changes that would affect some limited companies. The Corporation Tax rate will change to 19-25% for the 2023/24 tax year, but only under specific circumstances. Here’s is a summary of how the new rates are applied:
From the 1st of April 2023 businesses classed as ‘Main Rate’ will pay 25% Corporation Tax.
Companies with taxable profits below £50,000 will continue to pay 19%.
If your business profits are between £50,000 and £250,000, you will be able to claim a marginal relief rate, which reduces your rate below the 25% bracket.
For those with more than one limited company, your companies are known as “associates”. The thresholds of £50,000 and £250,000 are divided by the number of associated companies you have. For example, if you have two associated companies, the threshold of £50,000 and £250,000 will fall to £25,000 and £125,000 respectively. This means that you’ll pay 19% on profits below £25,000 and 25% on profits above £125,000 in Corporation tax for either of your two companies.
It’s estimated that the higher rate will only affect 10% of UK businesses. Most businesses will fall into the marginal relief threshold. Gov.uk has provided a marginal relief calculator to help you work out what your marginal relief will be.
How can I protect myself?
Pay yourself a larger salary
Traditionally, a tax efficient salary was equal to the employer’s national insurance allowance. However, if your profits are above £50k, it may be in your interest to declare a larger salary and take advantage of lower tax rates.
Income recognition
Accounting accurately for income in the correct accounting period is something which should be done every year. However, you may wish to pay close attention this year, as it may help to move income into a more favourable year, with a lower tax rate. Do you have any income that relates to the previous year when the tax rate was lower?
Moving profits to another company or a sole trade.
Moving profits to a sole trade may help, however you will have to consider national insurance payable on self-employment earnings. You will be taxed at your marginal personal tax rate.
Moving profits to another company may help, but only if the other company Is not “associated”. By this, it means not under the same control. For sole shareholders/directors, this could mean setting up another company in your spouses’ name. You could still be the director and even have shares that would allow you to receive a dividend, but you wouldn’t have the majority shareholding. Otherwise, the companies would be “associated” and the £50k threshold for the 25% tax rate would be spread over them.
Alternatively, if you have a company which is not utilising all the available threshold, it may be in your interest to move some profits over to it from another company.
Restructuring
If you have an “associated” company which is small or has no profits, you may wish to consider striking it off, or making it dormant. Otherwise, the higher rate tax thresholds will be spread between this and your other company.
Investing in assets
Capital allowances are available on eligible “Plant and Machinery”. So, if you’re thinking of investing, make sure you do it now to take advantage of the tax relief. It will bring your taxable profits down and may help bring you below the higher rate threshold.
Where to find help
Deciding on the best course of action is no simple task. Tax laws are convoluted and ever changing, so if you need help, please give Xoba a call to book an assessment of your business. We can estimate your tax bill based on available information and recommend action to take, to help mitigate against the higher tax rate.
