For UK business owners, the landscape of Corporation Tax has evolved, presenting new tiers and marginal relief considerations for 2024. Here’s a brief overview to demystify the current system and enable you to plan with confidence.

How you will be impacted by the increase in Corporation Tax

The UK’s Corporation Tax structure is designed to accommodate businesses of various sizes with varying profitability. Unlike a purely progressive tax system, Corporation Tax operates on a flat-rate basis, with relief available for those in the ‘marginal’ zone.

In simple terms, the rate of Corporation Tax has increased to 25%, but a marginal relief can be applied where profits are under £250,000 per year.

From the 1st April 2023, here’s what this means for your business:

  • Small Profits Rate: Businesses with profits up to £50,000 pay tax at 19%.
  • Main Rate: Profits above £250,000 attract a tax rate of 25%.
  • Marginal Relief: This provides a bridge for profits between £50,000 and £250,000, reducing the tax charge from the main 25% rate in a tapered fashion. Our table below gives you an idea as to how the rate of tax increases as profits increase.

To calculate the exact tax due, you can use HMRC’s Corporation Tax Calculator. However, here’s a simplified version for quick reference:

For those in the marginal relief zone, the calculation is designed to soften the jump to the higher tax rate. This transitional measure ensures that as profits rise, tax rates only increase gradually rather than abruptly.

Should we be concerned?

The change from taxes at 19% to 25% is a fairly hefty jump so businesses will need to stay on top of the increased liabilities so that it doesn’t come as a horrible shock when your tax return is due. We should also be aware that the more tax we have to pay from profits, then the less profit after tax there is available to pay as dividends. This will hit the ‘lifestyle’ companies who take all of their profits out as dividends.

Brace for Impact! How your accountant can help!

Prepare yourself for the inevitable by taking proactive steps to mitigate the impact. Here are four ways we help our clients stay on top of their Corporation Tax liabilities:

  • Monthly management accounts – so you know your numbers. We ensure our clients understand their profit or loss per month with comprehensive management accounts so our clients have a clear understanding of trading profits (or losses) for that month and the year to date.
  • Monthly corporation tax provisions – once we know the profit for the month, we can accrue your corporation tax liability at the correct rate.  This creates a provisional charge in your profit and loss account and a cumulative liability in your balance sheet. You’ll be able to see these in your Account Watchlist on Xero.

  • waterfalling cash into a Corporation Tax liability account – part of our month-end process is to check that you have enough cash reserves today to cover future tax liabilities. If you don’t, we work on a plan to make that happen.
  • Quarterly Tax Planning – regular review of opportunities to reduce Corporation Tax.

And remember, consulting with a qualified tax professional is always a prudent step to ensure your business is not only compliant but also capitalizing on potential tax efficiencies.

Keep an eye on updates, as tax rates and regulations can change. Your business’s financial health is paramount, and understanding Corporation Tax is a key component of that. Here’s to a profitable 2024!

If you want to REALLY know your numbers and have better control over your Corporation Tax – book a discovery call today!