2023 Corporation Tax: What you need to know

As outlined in the 2021 Budget, corporation tax is set to increase in April 2023 from 19% to 25% for companies with profits of £250,000 and over.

This change is set to be implemented on 1st April, 2023. Here’s what you need to know.

Corporation Tax Changes – The Lowdown

As well as this main rate increase, the 19% rate will be used as a small profits rate for small businesses with a profit margin of £50,000 (or less). Any companies whose margin is between these two sums will be expected to pay the main tax rate, albeit not immediately (more on this later).

Also, keep in mind this will be reduced by a marginal relief initially, but will be slowly increased to meet the main corporation tax rate.

If these changes apply to you, it’s a good idea to be prepared on how your organisation will adjust to the increase.

How 2023 Corporation Tax Changes Affect SMEs

End of Year Rates

For companies whose year end is 2022/23, your tax rate will remain at 19% until the next tax year, and for companies whose tax year is 2023/24, the new increased rate will apply to you (subject to your annual profits).

Any companies whose EOY tax date straddles the line will be expected to pay a hybrid rate of 22% (again, subject to profits).

Marginal Small Tax Relief (MSTR)

A company’s MSTR calculation:

(Upper Limit – Profits) x Basic profits/Profits x MSCR fraction.

• Upper limit: £250,000
• Profits: company trading gains
• Profits calculated: profits, plus basic profits, plus FFI (Franked Investment Income), which is dividends from third-parties (if applicable).

Ergo, the MSTR fraction is 3/200ths. To simplify:

Effective Corporation Tax Rate

The ECR calculated at various profit levels:

Dividends

Because dividends are paid via profit after corporation tax has been deducted, your profit margin will be less for the next tax year CT calculation, but the personal dividend tax (if applicable) will be less.

When it comes to dividend marginal rates, the easiest way to decipher yours is to consider the corporation tax percentage applicable to your profits, plus the dividend tax to the sum of £1000 of company profits.

Also, you will need to be mindful of the three dividend tax rates (which apply after CT):

Associated Companies

For associated companies, the new rates will be calculated via the number of associated companies per organisation.

Quarterly Tax Payments

If you pay your taxes in quarterly instalments, you may already be paying your fees via the hybrid rates, similar to those whose accounting period isn’t within the change dates.

Additional Help

If you’re a small or medium enterprise and are concerned about how these new corporation taxes may affect you, book a free consultation to discuss this and any other accounting and finance queries you may have.