Corporation Tax Increase (April 2023): Impact on Small Businesses

If you run a business, you may be concerned about the upcoming corporation tax rise in April 2023. This will see the rate jump from 19% to 25%, but not every business will pay this new rate. To clarify the situation, we’ve created this guide that covers all new corporation tax changes, including the Full Expensing (FE) scheme. Read on to find out more. 

Corporation tax is a charge levied at UK-based limited businesses and certain organisations on all profits, investments, and chargeable gains (such as selling an asset for more than your business paid for it). 

Eligible businesses are responsible for calculating how much corporation tax they owe and paying it to HMRC. Failure to pay your corporation tax can lead to severe penalties. 

As with other forms of small business tax, you’ll benefit from having an accountant to calculate your tax obligations and how much you owe accurately. This new change in tax rate illustrates the value of accountancy support even more because there are also new tax benefits available. Still, they must be carefully considered against your business’s needs and plans before making any decision.

If you’ve yet to find support from a knowledgeable accountant, why not register for our limited accounting service? We’ll make your tax obligations more efficient and be on hand whenever you need us. Click here to learn more, or keep reading to explore this new corporation tax rise in-depth. 

Corporation tax hike to raise £18bn a year in government U-turn: Will it hurt small businesses and the economy?

Corporation tax has long been a prominent issue for the current government. Since the Conservative Party came into power in 2010, the rate has been reduced from 28% to 19% by 2019. However, this low rate didn’t incentivise investment as the government had hoped.  

In 2021, then-Chancellor Rishi Sunak outlined plans to raise corporation tax to 25% – but this change was blocked until the most recent Spring Budget 2023. With so much back-and-forth, it’s worth reminding ourselves of the main points of support and opposition for the rate increase:

The government defends the apparent U-turn, stating that this 25% rate is still the lowest in the G7 group of advanced economies. In addition, the government introduced new tax incentives, giving us the joint most generous capital allowance regime of any advanced economy.

How new tax incentives work

To mitigate the impact of the change, the government also brought in a new series of tax incentives that will help most businesses reduce their overall tax liability. These are:

• A scheme called “Full Expensing”, or FE, allows taxpayers to deduct 100% of the cost of certain plant and machinery equipment from their profits before tax is calculated. This will run between the 1st of April 2023 to the 31st of March 2026 – meaning any eligible equipment bought during this period can qualify and be deducted immediately. The government claims this is an effective 25p tax saving for every £1 invested.
  
  
• The government also outlines a comparison whereby before the super-deduction and new rate increase, a business that pays 19% corporation tax but invests £10 million in main rate assets would have saved £342,000 on tax in year one. Under the new Full Expensing change, the same business would instead save £2.5 million on tax.
  
  
• The 50% first-year allowance, or FYA, allows businesses to deduct 50% of the cost of special rate assets that don’t meet FE criteria. This has been in effect since the super deduction scheme and was due to end in 2023, but will now continue for a further three years.
  
  
• A new version of the research and development tax scheme allows loss-making R&D-intensive SMEs to claim £27 for every £100 invested in R&D rather than the £18.60 available previously. 

How will this affect small businesses? 

Explaining marginal relief and the new thresholds

From the 1st of April 2023, corporation tax will rise to 25% – but only for businesses classed as ‘main rate’. Companies with taxable profits below £50,000 will continue to pay 19%. If your business profits between £50,000 and £250,000, you’ll instead be able to claim a marginal relief rate, which reduces your rate below the 25% bracket.

If you have more than one limited company, your companies are called associates. The thresholds of £50,000 and £250,000 are divided by the number of associated companies. For instance, if you have two associated companies, the threshold of £50,000 and £250,000 will fall to £25,000 and £125,000 respectively. That means, you will pay corporation tax at 19% on profits below £25,000 and at 25% on profits above £125,000 in either of your two companies. 

The government stated that the higher rate would affect only 10% of businesses – as 90% of UK companies report profits below the £250,000 bracket. The majority of businesses will instead fall into the marginal relief threshold, so you’ll need to use the government’s marginal relief calculator to determine what that will be. 

In real terms, you’ll pay the same rate you’re already paying if your business has taxable profits of less than £50,000 and between 19-25% for anything higher until your profits exceed £250,000. To make this as clear as possible, here are the brackets laid out in a table:

This variable rate, combined with the government’s new tax incentives, makes it clear that reducing your tax liabilities before taxable profit is calculated is incredibly important. The more you can write off through capital allowances such as FE and FYA, the less corporation tax you’ll have to pay. 

Take a look at our full guide on how to reduce your corporation tax to discover some of the ways you can reduce your tax burden and optimise profits. 

How to calculate your corporation tax 

Now we’ve explored the corporation tax changes, we hope this is a lot clearer. For the vast majority of UK businesses, changes will be minimal and, in some cases, the new allowances may reduce your tax payments. 

To determine what you’ll need to repay, you’ll have to calculate corporation tax based on taxable profit – not your gross income. Use our corporation tax calculator to get an idea of what you’ll owe. 

However, as with most tax issues, you can’t afford to make mistakes. We’d always recommend working with an accountant to not only calculate the exact tax bracket and figures that apply to your business, but also to prepare and submit documentation, organise payments, and guide you through the process. Get streamlined accountancy services for limited businesses from the team here at Crunch to make your business tax obligations easy.