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On 1 April 2023 there were some important changes to corporation tax. The rate changed, increasing from 19% to 25% and marginal relief was introduced

Now some companies will continue to pay 19%, some will pay 25% and others could pay anywhere in-between. What is marginal relief and how do you know what corporation tax rate to apply for your company?

For the 9 years from April 2015 to 31 March 2023 there was a single corporation tax rate for all companies. Most recently it was set at 19%. This rate was applied whether company profits were £100 or £100,000,000. Prior to that the rate of corporation tax depended on the size of the profits. Profits over a certain threshold were taxed at a different rate.

From 1 April 2023 we returned to this profit based approach, where not every company has the same corporation tax rate. Now there are effectively three corporation tax bands that your company could fall into.

Small profit rate

If your profits are below £50,000 then you fall into the small profits rate and will continue to pay corporation tax at 19%

Main rate

If your profits are above £250,000 then you fall into the main rate and will pay corporation tax at 25%.

If you are over the main rate limit then the whole amount of your profit will be taxed at 25%. It doesn’t work like personal tax where different slices of income get taxed at different rates.

Marginal relief – profits between £50k and £250k

If you fall between the two limits then things get a bit more complicated. You start at the main rate but get to apply marginal relief based on your profit level, so the actual percentage ends up below 25%.

Marginal relief is a way of gradually increasing the corporation tax rate for profits between £50k and £250k. The closer the profits are to £50k the more relief you receive and as profits increase, the relief amount decreases. It means profits close to £50k are taxed at a rate that is closer to 19% and as the profits increase, so does the rate, up to £250k and 25%.

Marginal relief sounds incredibly complicated!

This should be calculated automatically in your tax software when you prepare your corporation tax return. However you may also want to calculate corporation tax to help you with financial planning or saving for tax.

HMRC have a calculator that lets your check the marginal relief and effective corporation tax rate based on your profit (or predicted profit).

You can also calculate the corporation tax yourself using HMRC’s formula.

What counts as profit for marginal relief?

The calculation for marginal relief takes into account not just the profits that are usually chargeable to corporation tax, but also distributions from unrelated companies. These are items such as dividends or assets.

Some extra considerations

If your company has associated companies then this affects the limits and thresholds for marginal relief. Associated companies are where one company controls the other or where both are under control of the same person or persons.

The upper and lower limits get divided by the total number of associated companies. So a company had 3 associated companies (so 4 companies in total) then the upper and lower limit would be dividend by 4. This would give lower limit of £12,500 and an upper limit of £62,500.

Additionally the small profits rate and marginal relief doesn’t apply to non-UK resident companies or to close investment holding companies. These type of companies pay corporation tax at the main rate of 25%.

What if my financial year crosses 1 April 23?

If part of your financial year falls before 1 April 23 and part after, then the two parts of the year will be treated separately.

Your profits will be pro-rated based on the portion of the year before or after 1 April. For example if your year runs Jan 23 to Dec 23 then you have 3 months before 1 April 23 and 9 months after. With profit for the year of £120,000, you would have £30,000 before 1 April and £90,000 after.

The portion falling before 1 April 23 will be taxed at 19%. The portion falling after will be taxed under  the new rates with marginal relief applied if necessary. In the example, £30,000 would be taxed at 19% and £90,000 would be taxed using the marginal relief calculation.

For the portion of the year falling after 1 April 23, the upper and lower limits are adjusted proportionally. In this example the lower limit would be 9/12 * £50,000 = £37,500. The upper limit would be 9/12 * £250,000 = £187,500.

Quick and easy calculation method

If you don’t have any associated companies or distributions to take into consideration and your whole financial year is after 1 April 23, you can use the following quick formula to calculate your corporation tax at the marginal rate.

Multiply your profits above £50k by 26.5% and then add £9,500 (£50k at 19%).

For profit of £120,000 it would be (£70,000 * 26.5%) + £9,500 = £28,050 corporation tax.

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