Budget announcement adds layers of complication to corporation tax
The Association of Taxation Technicians (ATT) is highlighting that the introduction of a new small profits rate for corporation tax from 2023 will increase complexity, and that profits falling in the marginal relief band could be subject to surprisingly high effective tax rates.
In the Budget presented by the Chancellor today (3 March) it was announced that, from 1 April 2023, the main rate of corporation tax will be increase from 19 to 25 per cent for companies with profits over £250,000. At the same time, a new small profits rate of 19 per cent will be introduced for companies with profits up to £50,000.
Jeremy Coker, President of the ATT, said:
“The small profits rate will protect the smallest companies from the planned increase in corporation tax. But it will also add further complexity.
“Many of those dealing with corporation tax breathed a sigh of relief when the previous small profits rate was abandoned in favour of a single rate of corporation tax in April 2015. It seems odd that we are now moving away from that simplicity and back into the realm of multiple rates and marginal relief.”
Where a company has profits which are between £50,000 and £250,000 they will be charged corporation tax at the main rate of 25 per cent reduced by a marginal relief, resulting in a gradual increase in their overall corporation tax rate.
Jeremy Coker continued
“Introducing marginal relief removes an otherwise unwelcome cliff edge effect which would otherwise mean that a small increase in profits would make corporation tax rates shoot up. But we know from past experience that marginal relief calculations can be complicated, and make estimating future tax bills tricky.
“Due to how marginal relief works, those profits which fall into the marginal relief band of between £50,000 and £250,000 could also be subject to an effective tax rate of around 26.5 per cent - higher than the headline rate of 25 per cent.1
“The reintroduction of the small profits rate may therefore be welcome by the smallest companies, but might cause headaches for those whose profits lie in the middle ground.”
Notes for editors
1. This effective rate of 26.5% is calculated by comparing the tax which we understand will be payable by a company with profits of £250,000 (£250,000 * 25% = £62,500) with that payable by a company with profits of £50,000 (£50,000 * 19% = £9,500). This amounts to an extra £53,000 of tax (i.e., £62,500 - £9,500) payable on extra profits of £200,000 (£250,000 - £50,000) – an effective rate of 26.5%.