As we have previously reported, Corporation Tax rates for limited companies have changed, notably for those companies with taxable profit in excess of £50,000. The new tax rate of 25% applies if profits exceed £250,000, and where profits are between £50,000 and £250,000, the overall rate will be between 19% and 25%.

Profits falling within these two thresholds will be taxed at 25% minus a relief calculated at 1.5% of the difference between £250,000 and your profits.

Limited company profits example of £100,000

For example, if the profits are £100,000, they are taxed at 25% (£25,000), and then relief is given at 1.5% x (£250,000 – £100,000) = £2,250. So, the tax due to HMRC would be £22,750.

This compares to the less severe £19,000 tax bill if the corporation tax rate had remained unchanged at 19%. And remember, that 19% will apply to your limited company assuming its profits stay below £50,000.

Limited company profits example of £60,000

The effective rate on profits over £50,000 under the new corporation tax regime from April 6^th 2023, is calculated in the following breakdown, where we’ve used profits of £60,000 as an example:

Profit: £60,000

Corporation Tax: £60,000 x 25% – 1.5% x (£250,000 – £60,000) = £15,000 – £2,850 = £12,150 in HMRC liabilities.

Tax had profit been £50,000: £50,000 x 19% = £9,500.

Where the 26.5% corporate tax rate bites

The additional corporation tax due as a result of profits if £10,000 over the threshold: (£12,150 – £9,500) = £2,650.

So, the effective tax rate on the additional £10,000 of profit is 26.5% (2,650/10,000).

Therefore, tax of £12,150 is payable on profits of £60,000; equating to 20.25% which, as expected, is between 19% and 25%.

But the £10,000 has indeed been suffered tax at 26.5%. That is certainly higher than the 25% rate.

Mitigating rising corporation tax rates

Just over 1.5 million companies paid corporation tax for the financial year to 31 March 2022, but only 7% fell above the £50,000 small profits threshold. Although fewer than 100,000 companies are likely to be facing the 26.5% marginal rate of corporation tax where profits fall between £50,000 and £250,000, they will be mainly owner-managed companies with owners keen to mitigate the tax increase.

For a company with a 31 March year end and profits of £200,000, this year’s corporation tax bill is going to be £11,250 higher than last year.

Director’s self-invested personal pension (SIPP)

Even if a director has not previously been in favour of making sizable pension contributions, there can now be a compelling case for doing so.

• With a marginal tax rate of 26.5%, investing the maximum £60,000 into a SIPP will save corporation tax of £15,900.
• Once the director reaches 55, 25% of the pension fund can be withdrawn tax free, but virtually immediately if a director is already 55.
• There will be an overall tax saving if the tax rate eventually paid on pension withdrawals – taking into account the tax-free element – is less than 26.5%.

Even if there is no overall tax advantage as such, there will still be a timing benefit. The current year’s corporation tax bill is cut, but the tax cost does not apply until the director receives their pension income.

Mitigating cost and risk

By choosing a low-cost provider, the annual cost of maintaining a SIPP can be kept to a minimum.

If there are only a few years until retirement, a director might not want to be exposed to stock market volatility. This risk can be avoided by investing in fixed-term cash deposit accounts.

Other

There are many ways to reduce a company’s corporation tax bill, including capital allowances on certain property purchases, claiming all business expenses, claiming R&D Tax Relief & Patent Box Tax Relief (if possible) and offering share schemes to employees.

A number of these were covered in a recently issues Topical Tip, Corporate tax planning and why it is important to your business – Barnes Roffe, and we would encourage regular reviews of Corporation tax planning as getting the right corporate tax planning advice can make a huge difference to your profits and the growth of your company.

Whatever stage your business is at, corporate tax planning can not only deliver significant reductions in your tax bill but also provide a cash injection to your business or enable you to recruit and retain employees.

Summary

For more help or advice on changes to Corporation Tax and tax mitigation strategies, please do not hesitate to contact us.

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