_edited.png)
1. Understanding Corporation Tax Rates
In the UK, corporation tax is levied on the profits made by limited companies. Profits can stem from various sources such as trading activities, investments (except franked investments), and the sale of business assets. Companies with overseas branches are taxed on worldwide profits, but UK companies with subsidiaries abroad only pay tax on UK-based activities. Overseas companies with UK branches must also pay UK corporation tax on their UK operations.
As of 1 April 2023, the UK’s corporation tax rates have changed significantly:
19% Small Profit Rate: Companies with taxable profits below £50,000 continue to pay a corporation tax rate of 19%.
25% Main Rate: Companies with profits over £250,000 are taxed at a higher rate of 25%.
Marginal Relief for Profits Between £50,000 and £250,000: For companies with profits between £50,000 and £250,000, Marginal Relief allows for a gradual increase in the corporation tax rate, rather than a steep jump to 25%.
2. What Is Marginal Relief?
Marginal Relief is a mechanism that provides a sliding scale of corporation tax between the small profit rate and the main rate. It smooths the transition for companies whose profits fall between £50,000 and £250,000, effectively reducing their overall tax liability.
Who Can Claim Marginal Relief?
To be eligible for Marginal Relief, your company’s taxable profits must fall between £50,000 and £250,000 for the financial year starting 1 April 2023. If your accounting period is shorter than 12 months or if you have associated companies, the upper and lower thresholds are reduced proportionately. For example, if your company has two associated companies, the limits are divided by three, meaning the lower limit becomes £16,667 and the upper limit becomes £83,333.
3. Calculating Marginal Relief
To calculate Marginal Relief, the formula involves multiplying the marginal relief fraction (3/200) by the difference between the upper limit (£250,000) and your company’s actual profits. The result is the relief amount, which reduces the corporation tax liability. For example, if your company’s profits are £150,000, the calculation for Marginal Relief would be:
3/200 x (£250,000 - £150,000) = £1,500 (Marginal Relief)
The corporation tax liability is then calculated by applying the main rate of 25% to the profits and subtracting the relief:
£150,000 x 25% = £37,500 - £1,500 (Marginal Relief) = £36,000
4. Maximising Tax Deductions
Corporation tax is only payable on taxable profits. By maximising allowable deductions, you can reduce your taxable income, thus lowering your overall tax burden.
Here are some strategies to maximise deductions:
A. Utilising Allowable Business Expenses: Many business-related expenses are deductible, including:
Salaries, pensions, and National Insurance contributions.
Rent, utilities, and business rates for your office.
Professional fees such as legal or accountancy costs.
Marketing expenses.
Equipment and machinery depreciation (non-allowable) but eligible for capital allowances.
B. Claiming Capital Allowances: Investments in long-term assets such as machinery, equipment, or vehicles qualify for capital allowances, reducing your taxable profit. Research and development, patent rights, and intellectual property may also be eligible for enhanced relief.
C. Carrying Forward Trading Losses: If your company has incurred trading losses, these can be carried forward and set against future profits, effectively reducing taxable profits in subsequent years.
D. Offset Capital Losses: Capital losses from the sale of business assets can be offset against capital gains, lowering your tax liability. These can also be carried forward to offset future capital gains.
E. Research and Development (R&D) Tax Credits: R&D tax credits allow innovative companies to deduct qualifying research and development expenses from their taxable income, offering significant tax savings. For small and medium-sized enterprises (SMEs), this could result in a cash repayment from HMRC.
5. Marginal Relief in Practice
Using HMRC’s online Marginal Relief Calculator, companies can quickly estimate their corporation tax and the relief they may claim. The service requires input data such as the accounting period, total taxable profits, and details of associated companies or any distributions from unassociated companies.
6. Deadlines and Payment Methods
Corporation tax must be paid to HMRC within nine months and one day of the company’s accounting period end. If you fail to pay by the deadline, HMRC charges interest. Companies can make payments through various methods such as online banking, CHAPS, or debit/credit cards, with Faster Payments completing transactions on the same day.
Conclusion
Understanding and applying Marginal Relief effectively can significantly reduce the corporation tax burden for companies with profits between £50,000 and £250,000. In conjunction with maximising allowable deductions and utilising HMRC tools like the Marginal Relief Calculator, UK companies can optimise their tax position, ensuring they pay only what is due. Maximising tax deductions through smart financial planning, claiming capital allowances, and offsetting losses can also play a critical role in managing a company’s profitability and compliance with HMRC regulations.
If you have any questions about corporation taxes or would like to explore your options, contact PKPI Chartered Accountants at https://www.pkpi.uk/contact-us or schedule a consultation at https://www.calendly.com/gagan-singh-pkpi to see how we can help you achieve financial success and compliance.
Frequently Asked Questions (FAQs)
1. What are the deadlines for filing a corporation tax return and paying corporation tax?
A corporation tax return must be filed within 12 months after the end of your company’s accounting period. However, corporation tax payment is due earlier—9 months and 1 day after the end of the accounting period. Missing these deadlines can result in penalties and interest charges from HMRC.
2. What happens if my company has no profits or makes a loss?
3. Can I amend my corporation tax return after submission?
4. How do associated companies affect corporation tax and marginal relief?
5. What are some common tax deductions businesses overlook when calculating taxable profit?
Comments