21 March 2023
Along with many other changes to Business Taxation, Corporation Tax is also getting a shake-up in April 2023. We briefly mentioned this update in our ‘What Numbers Are Important’ video (which you can see below) but we want to take a moment to deep dive into the changes and help you understand what they mean for you and your business.
All companies must pay corporation tax on the profits that they make. From April 2023, the corporation tax rate will rise from 19% to 25% (for companies that generate over £250,000). This means that instead of paying 19% of profits to HMRC, you now must pay one-quarter of profits if your profits are over the £250,000 threshold. However, the current rate of 19% will still apply if your company generates £50,000 profit or less.
So, the main rates are rising from 19% to 25%. Pretty straightforward…however, smaller companies will not have to pay the full rate. It will completely depend on your level of profits for the fiscal tax year. If your company profits are £50,000 or under, the old rate of 19% will still apply. Larger companies with profits of £250,000 or over will pay the 25% rate. Between these two rates, a system of marginal relief will apply.
This new system of ‘marginal relief’ is actually not entirely new, as it will work in the same way as the 2014/2015 tax year (the last time marginal relief was applied to corporation tax). With this in mind, you can use the following formula to calculate your corporate tax liability.
Let’s use the example that your annual profit figure is £100,000.
In this example, the corporate tax liability is £22,750. This represents a tax increase of £3750 and means the rate of corporation tax is 22.75%.
Alongside these changes to Corporation Tax, the Research and Development Tax Credit incentive scheme will also undergo a few changes.
The changes implemented from 1st April 2023 impact the amount of relief that can be claimed, the types of activities that will qualify and the way in which businesses can claim relief. These changes have been introduced to ensure “the UK remains a competitive location for cutting edge research”, “the reliefs continue to be fit for purpose” and “taxpayer money is spent as effectively as possible”.
So, what are the numbers?
| Pre-April 2023 | Post-April 2023 | |
|---|---|---|
| Loss-making SME | Enhanced deduction: 130% R&D credit: 14.5% Benefit: 33.35% | Enhanced deduction: 86% R&D credit: 10% Benefit: 18.6% |
| Profit-making SME | Enhanced deduction: 130% Corporation tax rate: 19% Benefit: (up to) 24.7% | Enhanced deduction: 86% Corporation tax rate: 25% Benefit: (up to) 21.5% |
| RDEC Company | RDEC credit rate: 13% Corporation tax rate: 19% Benefit (after tax): 10.53% | RDEC credit rate: 20% Corporation tax rate: 25% Benefit (after tax): 15% |
We can help you account for the new changes to corporation tax, as well as apply for R&D Tax Credits.
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Get the lowdown on how Xero and cloud accounting make the tax year-end easier for freelancers and sole traders.
As the name suggests R&D Tax Credits are a government incentive to encourage companies across the UK to invest in research and development.
