We thought we were getting away with it, but the chancellor has pulled back on the mini-budget so the new corporation tax rates will come into effect on 1 April 2023 after all.
Companies making profits of less than £50,000 will not be affected as the small companies rate stays at 19%. Companies with profits above £50,000 will be taxed at 25% although they will be able to claim marginal relief on profits up to £250,000.
Calculating marginal relief on corporation tax
Although marginal relief helps to reduce the total corporation tax payable where a company’s profits fall between £50,000 and £250,000, the way in which it is calculated is based on a complex formula that has the effect of increasing the rate of corporation tax payable on profits falling within the marginal range, to a rate that is higher than 25%.
Effectively, the full amount of corporation tax at the rate of 25% is calculated before marginal relief is deducted. The marginal relief calculations are based on offsetting ‘augmented profits’ against the total taxable profits. According to HMRC, ‘augmented profits’ are the company’s total taxable profits plus exempt distributions from non-group companies. These include dividends, distribution of assets or amounts treated as a distribution on the transfer of assets or liabilities or the repayment of share capital.
Are you still here? We’ll continue:
Calculating the marginal relief
Marginal relief is given by reducing the charge to Corporation Tax (25%) by the following formula:
(U-A) x N/A x F
where
F = Standard marginal relief fraction (3/200)
U = Upper limit (£250,000)
A = Augmented profits
N = Taxable total profits
Marginal relief calculation
The accounts for ABC Ltd show total profits (taxable and augmented profits) of £100,000 for the year to 31 March 2024. The company has no associated companies. Marginal relief applies because profits fall between £50,000 and £250,000.
Taking these figures into the formula, we get:
(£250,000 - £100,000) X (£100,000 / £100,000) X (3/200)
= £150,000 X 1 X 0,015
= £2,250 (Remember this number)
Working out the corporation tax due
From the above example, you first calculate the tax due on profits at the standard rate. In the example above its £100,000 at 25%.
Tax £25,000
Marginal relief £2,250
Net tax payable £22,750
Therefore, instead of paying 25% on profits of £100,000 (£47,500), the company pays 22.75%
However, if profits were £50,000 the corporation tax payable would be £9,500, at 19%, therefore the corporation tax on profits exceeding £50,000 is £13,250, an effective rate of 26.5%.
A lot of you will have financial years which do not start on 1 April 2023 and end on 31 March 2024 and so the calculations are even more complicated. The profits for the year will be apportioned, and an appropriate percentage of the profits will be taxed at 19% (the 2022/23 rate), and a percentage will be taxed under the method above.
For help and advice on corporation tax planning and compliance, contact your Acumenica accountant in the usual way.
