If you run a small business, you’ve probably heard that the corporation tax you’re liable to pay on business profit has been increased from 19% to 25%.
As we operate in a post-pandemic and post-support measures world, many small businesses are already struggling. This increase in tax can certainly be a worry, but it’s important to understand exactly what it means for you and your business. What is the case for one small business may differ to the next. Ensuring you’re compliant without paying too little or too much is crucial, so here’s some helpful information to get you thinking seriously about tax…
What is Corporation Tax?
Corporation tax is the main tax that a Limited Company must pay on both the company’s profits and on any gains from selling assets (e.g., land, property or shares) that have increased in value.
You are responsible for ensuring that you pay the right amount of tax, so you must keep accurate company accounts and file a Tax Return by your deadline.
Your company will pay corporation tax of somewhere between 19% – 26% of its profits.
How much Corporation Tax do I need to pay?
In March, Chancellor Jeremy Hunt confirmed that as of 1st April 2023 the rate of corporation tax would rise from 19 per cent to 25 per cent.
But there’s some caveats!
This new 25% rate is just for companies with profits above £250,000.
Small companies with profits of £50,000 or less will continue to pay the previous 19 per cent rate.
For SMEs whose profits lie between these two bands, a taper system has been implemented which will see companies paying a marginal rate of 26.5% on profits that lie between £50,000 and £250,000.
Here’s a helpful overview…
| Tax Rate | 2023 |
| Small profits rate (companies with profits under £50,000) | 19% |
| Main rate (companies with profits over £250,000) | 25% |
| Marginal Relief Lower Limit | £50,000 |
| Marginal Relief Upper Limit | £250,000 |
| Standard fraction | 3/200 |
| Special rate for unit trusts and open-ended investment companies | 20% |
For those that operate more than one limited company in conjunction with each other, the thresholds are also reduced.
Benefit from your available Tax Allowances and Reliefs.
Tax Allowances
Any cost that your company incurs solely for the purposes of running the business can be deducted from the companies’ profits before tax, therefore reducing your corporation tax bill. These include (but are not limited to):
- Stock
- Salaries
- Pension Contributions
- Insurance
- Travel
- Training
Full Expensing Scheme
The new full expensing scheme announced in the Spring Budget offers companies the chance to claim 100% capital allowances on qualifying new main rate plant and machinery investments. This allows businesses to deduct some or all of the cost of an item from its profits before paying tax with no capital value limit. Currently, this scheme will run from 1 April 2023 until 31 March 2026.
Under full expensing, for every £1 a company invests in plant and machinery, their taxes are cut by up to 25p. The key difference here is that full expensing offsets 100% of the value against taxable profit, whereas super-deduction previously offset 130%.
Full Expensing is only available to companies that are subject to Corporation tax, and be aware that not all assets are eligible. Visit the Government website for further guidance on this: https://www.gov.uk/government/publications/full-expensing
Annual Investment Allowance
There are other options available for unincorporated businesses including the Annual Investment Allowance – a capital allowance incentive that offers the same benefits as full expensing for investments of up to £1 million per year.
AIA provides 100% first-year relief for plant and machinery investments up to £1 million. This is available for all businesses (including unincorporated businesses) and most partnerships. Expenditure on second-hand assets and those bought to lease to someone else can still qualify for Annual Investment Allowance.
| Annual Investment Allowance Example | |
| Pre-tax Profit | £100,000 |
| Cost of New Asset | £100,000 |
| Taxable Profit | 0 |
| Tax Saving | £19,000 |
Next steps to take.
A sensible next step would be to book some one-to-one time with your accountant.
It may be that your current business status – e.g., Limited Company or Sole Trader is no longer the most tax-efficient, or the way you pay your directors needs an update. It may even be that you’re not utilising your tax reliefs to their fullest and you could reduce your overall taxable profit further.
Often, there are small changes you can make to your business structure to become more tax efficient. Get some professional advice from a trusted Accountant and take good care of your hard-earned business profit where you can.
Moorgate Finance are happy to help wherever we possibly can, give us a call on 01908 92 62 62 or visit our blog for helpful articles.