The main rate of corporation tax has increased from 19 per cent to 25 per cent from 1 April 2023 for many companies.

Only businesses with taxable profits of £50,000 or less can apply the small profits rate of 19 per cent, with every other company seeing their Corporation Tax rate increase in this tax year.

There will be a marginal rate relief for companies with profits between the £50,000 lower limit and upper threshold of £250,000.

This effectively means that they will not be taxed at the full 25 per cent rate of Corporation Tax. To calculate how these companies are taxed you can use a simplified slab basis calculation.

This approach sees all profits up to £50,000 taxed at 19 per cent and profits above this but below the £250,000 upper threshold taxed at 26.5 per cent.

This will give you an effective rate of tax for the year which will be on a tapered scale depending on your profitability.

If your accounting period is shorter than 12 months these limits are proportionately reduced. These limits are also proportionately reduced by the number of associated companies the company has.

For example, if your company has three other associated companies, the limits are divided by four. Therefore, the lower limit becomes £12,500 and the upper limit becomes £62,500.

What is an associated company?

An associated company is defined as a company that has control over another company, or both companies are under the control of the same person or persons. The term “control” carries the same meaning as it does for close companies. It is irrelevant for tax purposes where a company is resident in determining its status as an associated company.

Even if an associated company exists for only part of an accounting period, it is still considered as such. However, if an associated company has not conducted any trade or business at any time during the accounting period or it is a passive holding company, it is disregarded.

Similarly, companies under the control of associates are disregarded provided that there is no ‘substantial commercial interdependence’ (SCI) between the companies concerned.

You cannot claim Marginal Relief if:

• You are a non-UK resident company
• You are a close investment holding company
• Your profits (including distributions from unrelated, non-associated companies) are over £250,000 however this is dependent on factors stated above in connection to associated companies.

If you have any queries about the recent changes to Corporation Tax and how it affects you and the companies you own, please speak to us today.