From 1 April 2023, there are two different Rates of Corporation Tax: the Main Rate and Small profits rates.

• The company tax year, known as a ‘Financial Year’ (FY), starts on 1 April.
• For FY 2023 (from 1 April 2023) the Main rate is 25% and the Small Profits rate is 19%.
• For FY2017-FY2022, there was a single 19% rate of tax.

If a company’s accounting period straddles 1 April 2023 it has two periods for Corporation Tax (i.e. FY2022 and FY2023) and may pay tax at different rates in each period as a result.

Corporation Tax From 1 April 2023

• The main rate of Corporation Tax increased from 19% to 25%.
  • The small profits rate (19%) applies to single companies* with Augmented profits of less than £50,000.
  • The main rate (25%) applies to single companies with Augmented profits of more than £250,000.
  • The main rate (25%) also applies to single companies with Augmented profits between £50,000 and £250,000, but marginal relief will be given.
    • The effective marginal rate is 26.5%.
  • The £50,000 threshold is known as the Lower Limit and the £250,000 threshold is known as the Upper Limit.

A UK company pays Corporation Tax on its Taxable Total Profits (TTP).

• TTP are accounting profits, as adjusted for tax, all other profits and income, plus capital gains less losses or reliefs claimed.
• A company prepares accounts for an accounting period which normally covers a year.
  • A company’s year-end is set according to its date of incorporation.
  • You can change that date.
• The company tax year, known as a ‘Financial Year’ (FY), starts on 1 April.
  • Many small companies change their accounting period to 31 March for convenience.
  • • When the company’s accounting period straddles 1 April 2023 it divides its TTP into two periods for Corporation Tax (i.e. FY2022 and FY2023) and may well pay tax at different rates in each period as a result.
  • An accounting period may be short or long depending on the date it was formed, the accounting period chosen or the date that it ceases its activities.

 The basic Corporation Tax calculation is as follows

The Marginal Relief calculation (FY2023 on, if applicable) is as follows:

When adjusted ‘Augmented’ profits fall between the Lower and Upper limits, Marginal relief is given by reducing the 25% Corporation Tax charge by:

Fraction x (Upper Limit – Augmented Profits) x Taxable Total Profits/Augmented Profits

In the legislation, it is described as: F x (U-A) x N/A

where:

• F = Standard marginal relief fraction (3/200)
• U = Upper limit
• A = Augmented profits
• N = Taxable Total Profits

Basic example

For a company with a 31 March 2024 year-end, TTP of £100,000, no Associated companies and no exempt distributions, the Corporation Tax calculation, including Marginal relief, is as follows:

What do we need to work out which rate of tax is paid?

Accounting periods

For a company accounting period which falls into FY2023, or later, most companies have to work through a set of new measures in order to calculate their profits for Corporation Tax and complete their company tax return.

The tax rate payable is determined by a number of different factors.

Activities

• Whether a company is a Close Company.
  • A company is ‘close’ if it is privately owned and controlled by five or fewer individual participators.
  • The tests for Control consider rights by shareholdings, voting power, loan creditors and the attributable rights of associates, of nominees or of beneficial entitlement and consider direct and indirect control.
    • See Close Companies: Definitions & Control
  • A Close Investment Holding Company(CIHCs)
    • CIHCs pay Corporation Tax at the main rate regardless of their profit level.
    • A CIHC is typically a company that either rents out land and property to a connected person or holds investments such as stocks or shares and cash on deposit.
    • Family Investment Companies may well be CIHCs.
    • A CIHC whose only income is exempt distributions will not have any TTP to tax.
  • There are special rules for oil and gas companies which are outside the scope of this web service.

Lack of activities

The following are not counted as Associated companies (see the test below) if throughout the relevant accounting period and FY they are a:

• Dormant company.
• Non-trading investment holding (‘passive’ holding) company.

A dormant company for Corporation Tax is a company that is:

• Not active.
• Not liable for Corporation Tax.
• Not within the charge to Corporation Tax

A non-trading investment holding company

• A company is Not treated as an Associated company for small company rate relief if it is either dormant or a non-trading investment/ ‘passive’ holding company.
• Any distributions received are distributed straight out to shareholders.
• Most distributions are exempt from tax when received by holding companies.

Relationships: Associated Companies

Does the company have any Associated Companies?

• The Upper (£250,000) and Lower (£50,000) limits are apportioned according to the number of companies that are Associated for Corporation Tax.
• Association is determined by considering control: the direct and indirect rights of an individual shareholder or loan creditor to influence a company.
• Companies which are connected via indirect control are not counted as Associated companies if no substantial commercial interdependence exists between them.
• You exclude passive investment companies and dormant companies (as above).
• A CIHC may be an Associate of another company
• See Associated Companies & tests for control and our Associated Company Checklist

Size: Augmented Profits are the measure to determine whether the company is below the adjusted Lower limit or above the Upper limit for Corporation Tax. The limits determine which rate is payable or whether Marginal Relief is given.

• Augmented Profits are TTP plus exempt income from dividends or distributions but excluding dividends from 51% group companies.
• You include dividends from UK and foreign companies.
• You exclude distributions paid from non-qualifying territories or from tax avoidance schemes.
• See Tab Augmented Profits

Accounting periods: different tax rates apply if a period falls into FY2022 or FY2023.

• The Upper and Lower limits are reduced where:
  • There is a short accounting period.
  • See Companies, Trading, Non-trading & Accounting periods

How is the marginal rate calculated?

If a small company’s rate is 19% and the main rate is 25%:

The marginal rate (i.e. marginal tax paid on the marginal profits) is 53,000/200,000 = 26.5%.

Shortcut Corporation Tax calculation 

The above calculation allows for a shortcut calculation using marginal tax rates, which avoids using the full marginal relief formula.

• The first £50,000 of profits are taxed at the small company rate (19%).
• The next £200,000 is taxed at the marginal rate (26.5%).
• Profits over £250,000 are taxed at the main rate (25%).

Using the example above of a company with a 31 March 2024 year-end, profits of £100,000, no associated companies, and no exempt distributions:

Marginal relief can be calculated using HMRC’s online calculator at ‘Calculate marginal relief for Corporation Tax’.

What is the marginal relief fraction?

The difference between the main rate and the marginal rate is expressed as a fraction: 26.5% – 25% = 1.5% = 3/200.

Residence

If a company is non-resident and subject to UK Corporation Tax & the relevant Double Taxation Treaty does not contain an Anti-Discrimination clause, it is taxed at the Main rate of Corporation Tax.

Credit: rossmartin.co.uk