New corporation tax rates: are you ready?

Dec 18, 2021

It’s been an expensive couple of years for the government. The pandemic has ushered in the highest level of public borrowing since the Second World War, rising to 17% of GDP in 2020-21. With the UK’s national debt currently standing at well over £2 trillion, we should expect to see a number of tax increases in the near future. 

As well as a 1.25% increase in both National Insurance rates and dividend tax in April 2022, Chancellor Rishi Sunak has announced that corporation tax will rise from 19% to 25% in April 2023. 

This sounds like a big jump, but it doesn’t apply to all businesses. Depending on your income, the change may not affect you at all. Even if your bill does rise, there are steps you can take to reduce the burden. Let’s take a closer look. 

Which businesses are affected? 

The current flat rate of corporation tax is a fairly recent development. Before 2015, UK businesses would pay one of two tax rates depending on their profit. This system will return in 2023, but with much lower thresholds. 

Businesses with an annual profit of less than £50,000 will be charged at the “Small Companies’ Rate” of 19%. If you fall into this category, your tax rate won’t change at all. Companies that make more than this will pay the new main rate of 25%. However, those that make less than £250,000 a year will be able to reduce their bill by claiming marginal relief.

It is also worth noting that these thresholds work differently from those used for income tax. While the higher rate of income tax is only paid on earnings over the threshold, the main rate of corporation tax applies to all earnings. This means that a company with an annual profit of £51,000 would be subject to the main rate on this entire amount, not just on the excess £1,000. 

How can I reduce my bill?

If your annual profit is more than £50,000, these changes could have a significant impact on your tax bill. Marginal relief will help, but the details of this are still unclear. Luckily, there are some things you can do in the meantime to prepare.

Invest in your business

You can reduce your corporation tax bill by taking advantage of Capital Allowances. The most common example is AIA (Annual Investment Allowance). This allows you to deduct the full value of certain purchases from your annual profits. AIA can be claimed on purchases that qualify as “Plant and Machinery”. Generally speaking, this applies to any equipment that is essential to your business. This includes:

  • Office furniture
  • Computer equipment
  • Tools and heavy machinery 
  • Business vehicles

The limit for AIA has been temporarily increased to £1,000,000 and a super deduction of 130% is currently available for most capital investment which will further reduce corporation tax liability. These will last until 31 March 2023, after which the AIA will revert to £200,000 and the normal AIA writing down reduction will apply. This means that it may be worth your while to carefully time investments in your business. 

Don’t forget the little things

Taking advantage of AIA can lead to some major savings, but smaller savings are also important. Make sure you claim for all allowable expenses including business mileage, advertising costs, stationery and phone bills. The more thorough you are, the more money you can save. This will help to soften the blow in 2023. 

While it is hoped the coronavirus crisis quickly subsides, the economic impact will be with us for many years. Therefore we imagine these tax raising initiatives will be here to stay post-COVID.

For more tips on corporation tax, or for any other financial advice, don’t hesitate to give us a call.