The UK government has recently announced changes to Corporation Tax in 2023, the tax paid on the profits of UK companies. These changes include an increase in the rate of Corporation Tax for higher profit companies.
From April 2023, the rate of Corporation Tax will increase from 19% to 25% for companies with profits over £250,000. The rate for companies with profits below £50,000 will remain at 19%. However, for companies with profits inbetween these limits tax will be tapered to reduce the impact on small businesses. This change is expected to affect around 10% of companies in the UK.
Sign up for our New Email Blast!
Why are the Changes to UK Corporation Tax Happening?
The government has stated that the increase in Corporation Tax is necessary to help pay for the costs of the COVID-19 pandemic and to support public services. The Chancellor of the Exchequer at the time, Rishi Sunak, said that the changes were “a fair and necessary contribution to the economic recovery”.
Many businesses have expressed concerns about the impact of this change on their finances. The Federation of Small Businesses (FSB) has warned that the increase could discourage investment and growth, particularly for smaller companies.
How will These Changes to UK Corporation Tax Effect my Business?
So… From April 2023 the new corporation tax calculation will be in place and your business may be effected by it.
What it means is simple:
| Profits | Tax Percentage |
| Under £50,000 | 19% |
| Between £50,001 – £250,000 | 19% – 25% |
| Over £250,000 | 25% |
These changes are estimates to affect 10% of Limited Companies in the UK, so it’s not an eye watering imagination to think the majority of people will not be adversely impacted by these changes.
However, if you are one of the unlucky ones… This is how the 3 calculations will go down in your accountants office.
For Profits Under £50,000
The main rate of Corporation Tax is still in place:
£50,000 profit x 19% = £9,500 Corporation Tax Due
For Profits £50,000 – £250,000
This is where tax gets complex, but here we will walk you through every step of the process.
If you fall into this band, you will be ‘split taxed‘, which means you will have a portion of your profits taxed at one percentage, and the rest at another.
If a company has a £150,000 profit, it will pay 25% Corporation Tax on that profit. However, because the profit of the company is not yet £250,000 the company will receive a discount calculated at 1.5% of the difference between it’s profits and £250,000.
For example:
Profits of £150,000 taxed at 25% = £37,500
Relief calculation: 1.5% x (£250,000 – £150,000) = 1.5% x £100,000 = £1,500
So the tax (£37,500) minus the relief (£1,500) would give the company a Corporation Tax bill of £36,000. An effective tax rate of 24%.
Limited Company Profits of £70,000 Example:
Corporation Tax – £70,000 x 25% – 1.5% x (£250,000 – £70,000) = £17,500 – £2,700 = £14,800 HMRC liability for Corporation Tax. An effective tax rate of 21.14%.
You can now see that the profit amounts falling between £50,000 and £250,000 have a reduced rate of tax which is tapered up to the maximum limit.
For Profits Over £250,000
Another easy one… All profits are taxed at 25%
£250,000 profit x 25% = £62,500 Corporation Tax Due
This is the top tier tax limit for Companies in the UK.
What are the Effective Tax Rates for Different Profits?
With the altered calculation, it can be confusing for business owners to figure out or guestimate their tax bill at the end of the year, so they can plan it into their cashflows.
So here is a table that will outline some effective tax rates at different profit levels throughout the middle tier:
| Profit | £50,000 | £75,000 | £100,000 | £150,000 | £200,000 | £250,000 |
| Effective Tax Percentage | 19.00% | 21.5% | 22.75% | 24.00% | 24.63% | 25.00% |
The effective tax rate applies to the entire profit.
How can you Reduce the Impact of Changes to UK Corporation Tax?
The Super Deduction
The government has introduced some measures to soften the impact of the changes. For example, a new “super-deduction” has been introduced for companies investing in new plant and machinery. This will allow companies to deduct 130% of the cost of their investment from their taxable profits.
| Asset Purchase (New Items) | Apr 2021 – 31st Mar 2023 | After March 2023 |
| – Machines such as computers, printers, lathes and planers. – Office equipment such as desks and chairs. – Vehicles such as vans, lorries and tractors (but not cars). – Warehousing equipment such as forklift trucks, pallet trucks and stackers. – Tools such as ladders and drills. – Construction equipment such as excavators, compactors, and bulldozers. – Some fixtures such as kitchen and bathroom fittings and fire alarm systems. | For every £1 spent, you get £1.30 of Tax Relief up to £1 million | For Every £1 spent, you get £1 of Tax Relief up to £1 million |
Also, with more and more businesses going green… The Government has introduced a corporation tax discount for companies that either reduce their carbon output, or invest in bettering the environment they affect.
What can Going Green do for my Corporation Tax?
In short… Nothing!
The main goal of the Going Green initiative is to help smaller companies reduce carbon output. Therefore schemes such as the Climate Change Levy (CCL) or the Enhanced Capital Allowances (ECA) help businesses reduce costs by implementing energy savings measures… As well as giving companies more tax relief on purchases made to reduce carbon output.
Climate Change Levy
The Climate Change Levy was a tax on energy use throughout your company. Which charges you the following rates:
| Taxable commodity | Rate from 1 April 2020 | Rate from 1 April 2021 | Rate from 1 April 2022 | Rate from 1 April 2023 | Rate from 1 April 2024 |
|---|---|---|---|---|---|
| Electricity (£ per kilowatt hour (kWh)) | 0.00811 | 0.00775 | 0.00775 | 0.00775 | 0.00775 |
| Gas (£ per kWh) | 0.00406 | 0.00465 | 0.00568 | 0.00672 | 0.00775 |
| LPG (£ per kilogram (kg)) | 0.02175 | 0.02175 | 0.02175 | 0.02175 | 0.02175 |
| Any other taxable commodity (£ per kg) | 0.03174 | 0.03640 | 0.04449 | 0.05258 | 0.06064 |
You can see how the amounts fall as time goes on… This is because the UK government wants to reduce the cost burden of energy on businesses. Therefore giving them more cashflow to grow and invest in energy savings materials.
Reducing energy usage, and carbon emissions can help you reduce these charge.
Another way you can reduce the Climate Change Levy charge is by forming an agreement with the UK Government.
The Climate Change Agreement (CCA) is an agreement between individual businesses and the UK Government, whereby you receive the discounted Levy charges outlined below, and in return you use the saved money to invest in energy savings materials and assets that will lower your fossil fuel dependancy and carbon emissions in the long run.
| Taxable commodity | Rate from 1 April 2020 | Rate from 1 April 2021 | Rate from 1 April 2022 | Rate from 1 April 2023 | Rate from 1 April 2024 |
|---|---|---|---|---|---|
| Electricity | 92% | 92% | 92% | 92% | 92% |
| Gas | 81% | 83% | 86% | 88% | 89% |
| LPG | 77% | 77% | 77% | 77% | 77% |
| Any other taxable commodity | 81% | 83% | 86% | 88% | 89% |
To summarise the Climate Change Levy… It is a scheme that charges businesses that have high levels of carbon emissions. But, you can reduce these charges by entering into a Climate Change Agreement, and investing in greener assets and processes that will reduce your carbon output in the long run.
Enhanced Capital Allowances
The UK government has introduced a number of tax incentives and relief schemes to encourage businesses to invest in low-carbon technologies and energy efficiency measures.
For example, The Enhanced Capital Allowances (ECAs) scheme is a UK government initiative that provides tax incentives to businesses that invest in certain energy-saving equipment and technologies. Under this scheme, businesses can claim 100% first-year capital allowances on qualifying investments, which means they can deduct the full cost of the investment from their taxable profits in the year of purchase.
Some of the technologies and equipment that are eligible for ECAs include:
- Energy-efficient motors and engines
- Boilers and heat pumps
- Lighting systems
- Building insulation
- Heating, ventilation and air conditioning (HVAC) systems
- Water-efficient equipment and technology
- Certain types of refrigeration equipment
To qualify for ECAs, the equipment or technology must meet certain energy efficiency criteria and be listed on the Energy Technology List (ETL) or the Water Technology List (WTL). These lists are maintained by the government and provide information on the eligible products and technologies.
In addition to the tax incentives, businesses that invest in energy-efficient equipment and technologies can also benefit from reduced energy bills and improved environmental performance. The ECAs scheme therefore encourages businesses to invest in sustainable technologies and improve their energy efficiency, which can help to reduce their carbon footprint and support the transition to a low-carbon economy.
What are the Other Ways I can Reduce my Tax?
Reducing tax isn’t easy, unfortunately it can only be done by spending money.
- Asset purchase is the number one way to reduce tax bills for Limited Companies in the UK, as the UK government allows all companies to purchase up to £1 million worth of assets per year to reduce the corporation tax of the company.
- Higher Salaries for Directors is another way to mitigate corporation tax. If your directors are on low wages and receive dividend then you can up their wage and lower the dividend as salary is a tax deductible expense. You may want to check the personal tax situation of your directors because this plan could impact it.
- Investing in Stock can lower your profit for the year as long as it is working capital. Because this will increase your cost of sale, and therefore lower profit
These are some of the ways you can lower your corporation tax bill in the coming year. For more advice you can reach out to our consultancy firm RGE & Co who can give you up to 2 hours of free advice.
Conclusion
Overall, the changes to Corporation Tax are a significant development for UK businesses. While the increase in the tax rate may be unwelcome for some, the government’s measures to support investment and growth will provide some relief. It will be interesting to see how businesses respond to these changes, and whether they will have the intended effect of supporting the economic recovery.
