With the corporation tax rate increasing to 25% in April 2023, the timing of income and expenditure could be even more crucial over the next few weeks. What do you need to consider?
Corporation tax rate hike
The main corporation tax (CT) rate will be increasing from 1 April 2023 onwards. The rate will be 25% where the company’s taxable profits exceed £250,000 and 19% where the profits are £50,000 or less. When profits fall between £50,000 and £250,000, CT will be charged at 25% and reduced by marginal relief. Effectively this means that the first £50,000 profits are taxed at 19%. The next £200,000 are taxed at a marginal rate of 26.5%. Then a 25% rate will apply on the remaining profits.
The limits must be reduced if your company has associated companies by dividing the limits by the number of associated companies plus one. If your company has one associated company, then you will be halving the lower limit to £25,000.
March 2023 year end
If a company that has a 31 March year end finds that their profit forecast for the 31 March 2024 year shows that it will be liable to 26.5% or 25% tax, then they need to start considering whether any income could be brought forward to the current year so it is taxed at 19%; and whether any expenditure could be delayed until April 2023, so it gets a higher tax relief.
Accelerate any larger sales to before April 2023 as it could mean a corporation tax saving of up to 7.5%.
For example, if you had sales of £20,000 in March 2023, the tax on the sales would be £3,800. If you make the sales in April 2023, the tax would be up to £5,300 – an increase of £1,500. Do be aware that accelerating sales will mean the corporation tax is due a year earlier. Only consider this option if you have the cash flow to support it.
Non-March year ends
Unfortunately, now that we’re in March 2023 if your company has a non-March year end, it won’t make any difference if you accelerate sales to before April 2023. For non-March year ends, you will use a hybrid/mixed tax rate on the profits.
Let’s say your accounting period ends on 30 June 2023 and its taxable profits are over £250,000. The effective tax rate will be: nine months at 19% and three months at 25%. That is 20.5% for the whole period from 1 July 2022 to 30 June 2023.
If the company changed its year end to 31 March 2023 it would pay tax at 19% on all its profits to 31 March 2023. Therefore, if your company is looking at higher than expected profits in the year ended 2023, it could be worth shortening the company’s year end in order to save more corporation tax.
