On the Autumn Statement 2022, Chancellor Jeremy Hunt announced that an increase of up to 6 per cent in the corporation tax rate for companies with profits more than £250,000 will continue to take place in 2023, which means that the rate of corporation tax (CT) is set to rise variably from 19 to 25 per cent next year.
Temporarily cancelled by the ex-Prime Minister Liz Truss who didn’t believe in the tax rise, the change in corporation tax rate continues, especially with Rishi Sunak now being the new Prime Minister. Cancellation of the tax rise will not happen, and companies that earn bigger are going to inevitably face an increase in their tax liability in 2023.
There were a lot of changes in the tax system, given the prime ministers and chancellors going in and out of the role, but the tax rise remains. In this article, we give a comprehensive guide about the corporation tax rate 2023 and how to calculate the corporation tax rate, presenting the new tax rate table and the government’s plans to restore the public finances.
New Tax Rate Table
A new variable of corporation tax rate of 19 to 25 per cent is to take effect the next year, with differing rates for the companies with profits on the lower and upper threshold. Formerly, a full rate of 19 per cent applies to all companies regardless of their size.
Amongst G7 countries, this is the lowest rate for corporation tax so far yet adequately internationally competitive, affecting the most profitable businesses as the small profits rate remains to be at 19 per cent.
The UK government has decided to restore the public finances by making the highest earners pay a larger share, which sounds fair for lower-earning ones, providing more support for companies with profits on the lower threshold as well as the high street.
This means that only 70 per cent of companies active in the trade will not have to deal with the increase this 2023. However, considering that the government wants larger businesses to pay a bigger share, the bank corporation tax surcharge will be increased to 3 per cent, charged on banks making profits of more than £100 million.
Take a look at the new rates for the tax year 2023/24:
| Profit | Tax Rate | |
|---|---|---|
|
Small Profits Rate |
£50,000 & less |
19% |
|
Lower Threshold |
£50,000 to £250,000 |
19 to 25% (marginal relief applicable) |
|
Upper Threshold |
£250,000 & more |
25% |
When Will the New Tax Rate Take Effect?
This April 2023, higher-earning companies are to face an increase in their corporation tax bills. The increase for bank corporation tax surcharge will also take place in April 2023.
The variable rate ranging from 19 to 25 per cent will be for the tax 2023/24 tax year and may be subject to change for the succeeding years.
How to Calculate Corporation Tax
Calculating corporation tax will need both accounting and bookkeeping skills. It’s best to seek help from an accountant to accurately work out corporation tax and prepare a company tax return, although businesses could also do the calculation by themselves.
Firstly, they will need to create a profit and loss account to compute the total sales profits, including interests earned from savings. Next is calculating the overheads or business expenses. Allowable and capital expenses can be deducted from the total income, reducing the tax bill as a result.
Allowable expenses, as they are used to purchase services or products used to keep business operations, are not taxable. They are “exclusively and wholly” intended to generate income for the business, including expenses for office, business travels, salaries, heating and lighting, rental, advertising and marketing, and more.
Capital costs, on the other hand, are also given a capital allowance or investment allowance tax relief, with a limit of £200,000 each year. Capital asset purchases are fixed assets, such as machinery, equipment, and business vehicles.
Both allowable expenses and capital costs reduce businesses’ corporation tax dues. Expenses used to entertain suppliers and clients are not considered allowable expenses; hence, they are not tax-deductible. Businesses cannot claim VAT or any tax relief on these kinds of costs.
Depreciation of capital assets cannot be used to reduce tax as well. Both entertainment costs and depreciation are added to the total profits. Capital allowances and allowable expenses are then subtracted to the profit value.
Having worked out the profit value, they can then work out the corporation tax rate, which differs from 19 to 25 per cent based on their taxable income bracket. They divide the taxable profit by 100, then multiply the result by their designated tax percentage to arrive at the corporation tax rate.
Example:
John runs a limited company by himself and is not VAT-registered. His annual turnover is £60,000. His taxable profit will be worked out only after allowable expenses are reduced. Let’s say the following are his expenses for operating the business:
|
Staff Salary |
£8,600 |
|
Software |
£1,000 |
|
Travel |
£1,500 |
|
Accounting Fees |
£1,000 |
|
Total Expenses |
£12,100 |
His annual turnover would be reduced to £47,900, in which the small profits rate of 19 per cent is applicable. The said amount is his total profits before he pays corporation tax. 19 per cent of £47,900 would be £9,101, which would be his corporation tax bill. His total profit after corporation tax would be £38,799.
Autumn Statement 2022
The UK government has decided to help smaller companies, as stated in the Autumn Statement 2022. Aside from retaining the small profits rate to 19 per cent to support smaller businesses, the government is also encouraging more businesses to invest and grow by setting the Annual Investment Allowance (AIA) at £1 million.
An AIA of £1 million is already the highest fixed level, allowing 99 per cent of businesses in the UK a full expensing. This also makes tax easier for those that invest between £200,000 and £1 million.
The government also aims to reduce businesses’ burden for the increasing rates by providing them with £13.6 billion support throughout the next five years.
How Legend Financial Can Help
References
UK: Tax proposals in Autumn statement. (17 November 2022). Retrieved from KPMG: https://kpmg.com/us/en/home/insights/2022/11/tnf-uk-tax-proposals-in-autumn-statement.html
AUTUMN STATEMENT: WHAT’S IN STORE FOR CORPORATION TAX AND INNOVATION AND INVESTMENT? (17 November 2022). Retrieved from PKF: https://www.pkf-francisclark.co.uk/autumn-statement-whats-in-store-for-corporation-tax-and-innovation-and-investment/
Autumn Statement 2022 HTML. (17 November 2022). Retrieved from Gov.UK: https://www.gov.uk/government/publications/autumn-statement-2022-documents/autumn-statement-2022-html#:~:text=The%20Autumn%20Statement%20reduces%20the,two%20years%2C%20to%20April%202028.
