Everything small businesses need to know about the corporation tax increase from April 2023

At the Spring Budget 2023 earlier this week, the Chancellor confirmed that corporation tax will be increasing from 1st April 2023. It's quite a big jump, from 19% to 25%. Although it was originally announced a while ago, from speaking with business owners recently it seems as though the impact of this isn’t really understood. So if you’re not sure about what it means for your business, get comfy and we’ll get started!

Corporation tax applies only to limited companies, so if you’re a sole trader with no plans for a limited company in the near future, you can jump off here. You directors, buckle up.

It’s not increasing for everyone

The new 25% rate will actually only apply to businesses with profits over £250,000. Businesses with profits below £50,000 will continue to pay 19%, called the small profits rate. This doesn’t need to be applied for, you’ll automatically be on the lower rate if your profits are under £50,000.

You can continue saving towards your corporation tax bill knowing that you’ll pay 19% of your taxable profit. If, however, you’re already at or are planning a 6 figure turnover, read on as you need to know how this will impact your tax.

What about businesses in between?

For those with profits between £50,000 and £250,000, this is where is starts to get a little confusing. Rather than being stepped, say profits under £75,000 pay X% and under £100,000 pay Y%, there’s something called marginal small companies relief.

Marginal small companies relief means there’s a gradual increase from 19% to 25%. It also means there’s some maths to do. Don’t worry though, this is something that your accountant will work out for you, let our calculators do the work for you! But I’m a big believer that you should know what is happening in your business, even if you’re not doing the work, and that applies to tax too. So let’s have a look at how it works in practice.

How it works

There are two ways of calculating the tax due, personally my brain works better with the second one, but let’s go through both.

Say hello to Sadie. Sadie is a business strategist/coach and sells online programmes. Her profits are £75,000.

Method 1

This way works out the tax due at 25%, and then works out the marginal relief. Deduct that from the first figure and you’ve got the amount of tax due.

£75,000 x 25% = £18,750 - this is how much tax would be due if there was no marginal relief

We then deduct the profits from the upper limit of £250,000, and multiply that by the relief fraction of 3/200, so

(250,000-75,000) x 3/200 = £2,625 relief

Deduct the £2,625 relief from the £18,750 tax and we get a final tax figure of £16,125.

Method 2

An alternative way of looking at it is that profits below £50,000 are taxed at 19% and profits between £50,000 and £250,000 are taxed at 26.5%.

£50,000 x 19% = £9,500 tax on your profits up to £50,000

£25,000 x 26.5% = £6,625 tax on your profits between £50,000 and £75,000

Total tax = £16,125

How am I supposed to know how much to save?

This all makes it a bit trickier to work out how much you should be saving towards your tax throughout the year. Because you’re definitely saving throughout the year…right?! Rather than just being able to do 19% of everything, you need to give a little more thought to your planning.

There are a few different ways of approaching it. You could use HMRC’s handy little calculator on a regular basis to work out what the total rate is, and making sure that you’ve got enough to cover that. Or, save 19% until your profits hit £50,000, and then 26.5% after that.

So while the headlines saying corporation tax is going up to 25% are true, it’s not fully accurate for small businesses. If you’re looking to grow your business beyond that £50,000 profit figure, please don’t let the 25% put you off. On the flip side though, if you’re hovering around £50,000, I’d recommend a chat with your accountant about whether it would be best for you to put plans in place to bring you under that threshold, such as making pension contributions.

Getting a rough idea of your corporation tax amount is definitely not as straightforward as it used to be, but it is important that you know what you’re likely to need to pay. If you’d like to discuss how it will effect you and your business, get in touch for a chat.