Changes to UK corporation tax rates from 1 April 2023

New 2023 corporation tax rates for UK companies

From April, businesses will pay the higher 25 per cent corporation tax rate, provided they report profits above £250,000. Smaller entities with profits of up to £50,000 will remain at the previous 19 per cent rate.
 
All other businesses that file profits of £50,001 and above but below £250,000 will receive marginal relief of 26.5 per cent. Marginal relief implements a gradual increase in corporation tax rates for companies making profits that fall between the lower and upper limits.
 
For example:

• A business with a taxable profit of £85,000 will pay 19 per cent up to the first £50,000, then 26.5 per cent up to £250,000 = £18,775.
• If the profit were to increase to £250,000, the same calculation would apply, giving rise to a corporation tax liability of £62,500.
• A larger company with a profit of £300,000 would pay their full tax bill based on a 25 per cent rate = £75,000.

 
The 19 per cent rate for smaller businesses is called the small profits rate (or SPR). Further information about applying the small profits rate and marginal relief is available through CTM03900.

 

Exceptions and provisions for introducing new corporation tax rates

The new business tax rates are relatively straightforward, but with countless types of incorporated business and trading structures, there are provisions and adjustments in place, including in the following scenarios.

 

Companies with short tax years

If a taxable business trades over a shorter tax period, the thresholds to qualify for the full 25 per cent tax rate or the lower small profits rate will be reduced proportionally, based on the number of trading months within the reduced reporting period.
 
For a trading period of nine months between 1 January and 30 September 2024, the company would divide each threshold by 9/12 to reach a revised lower limit threshold of £37,500 and an upper threshold of £187,500.
 

Reporting periods straddling 1 April 2023

Businesses with corporation tax reporting periods that finish at any time other than 31 March will have their corporation tax obligations time apportioned.
 
Companies will calculate their corporation tax liability using the same apportionment rules, based on the number of months within the trading year that fall into the 2022/23 tax period, and the remainder that are subject to new tax rates from April onward.

 

Rules for associated companies

New associated company rules will replace the previous group company test. The determination test is the same regardless of the size of the company and applies equally to large or very large organisations and whether or not they are subject to quarterly instalment payments.
 
Companies are normally considered in association with another if, at the time or at any point within the previ­ous year, one company has controlled the other or the same person or group has controlled both companies. If a company has one or more associated businesses in the same accounting period, the thresholds relevant to corporation tax are divided by the count of associate companies.
 
In effect, the £50,000 small profits rate and £250,000 standard corporation tax threshold is reduced depen­ding on how many associate companies are involved within the same control structure or subsidiary structure.
 
Non-UK resident businesses are included in the associated companies rule, but dormant companies are not, nor are some passive entities. A company can be considered an associated company regardless of its residency location for tax purposes.
 
Associate companies are also counted if they have been associated for part of the accounting period but are disregarded if they have not traded at any time during the reporting year.
 
The calculation, according to the guidance in the Company Taxation Manual, works as follows:

• The upper and lower corporation tax thresholds are divided by the total number of associated companies (including the subject company).
• A company with three associate companies would therefore divide the lower limit of £50,000 by four and the upper £250,000 limit by four, changing the thresholds to £12,500 and £62,500, respectively.

 

If the subject company uses a different accounting period that does not coincide with the changes in corpora­tion tax rates, the thresholds are further apportioned between tax periods.
 
Companies categorised as large or very large and required to pay corporation tax instalments use the same associate company calculation basis.
 

Substantial commercial interdependence

A further complexity arrives when companies are associates but have no commercial dependence on each other. In this scenario, attribution (or shared ownership) is not considered.
 
Companies need to assess whether they are associated by way of financial, economic or organisational depen­dence on each other:

• Financial interdependence occurs if one company financially supports the other, directly or indirectly, or holds a financial interest.
• Economic interdependence applies if both associates have the same financial objectives, the activities of one company benefit the other, or their trade involves a customer in common.
• Organisational interdependence refers to companies with the same management, workforce, premise or trading equipment.

 
In some cases, determining whether companies are categorised as associates for tax purposes may be com­plex, and professional advice may be necessary.

 

Corporation tax for ring fence companies

Ring fence companies are those that profit from oil or extraction rights in the UK, and corporation tax rates vary.
 
Until 31 March 2023, eligible companies can claim marginal relief against profits of £300,000 to £1.5 million, which will then reduce in line with the reformed corporation tax regime with marginal relief against profits from £50,000 to £250,000.
 
However, effective corporation tax rates differ from other company structures:
 

​Tax rate	​1 April 2023 onward	​Until 31 March 2023
​Small ring fence rate for companies with profits of less than £50,000	​19 per cent	​N/A
​Small ring fence rate for companies with profits of less than £300,000	​N/A	​19 per cent
​Ring fence rates for companies with profits over £250,000	​30 per cent	​N/A
​Ring fence rate for companies with profits over £1.5 million	​N/A	​30 per cent

UK corporation tax for global companies

Corporation tax is levied on all residential companies in the UK against their worldwide profits. Non-resident companies pay UK corporation tax only on the trading profits derived from trade within the UK or that deal with or involve developing British land. Taxes also apply to activities producing chargeable gains linked to direct and some indirect disposals of UK properties, including profits made from British property rental companies.
 
In practice, the change to corporation tax rates should be unambiguous for most UK-only businesses to implement, and those with standard trading structures, but other considerations apply if they are:

• associate businesses with any other company or companies
• a UK branch or hub of an international company
• a ring fence company
• trading within a short accounting period
• dormant or passive companies
• filing accounts that fall into both the 2022/23 and 2023/24 tax years

 
It is advisable to seek guidance if there is any doubt about whether the associate company rules apply and if there is any confusion about how and to which profitable activities the new corporation tax rates apply.