Budget 2021 - Changes to Corporation Tax rates in 2023

CHANGE IN TAX RATE - SUMMARY

Since April 2015 the UK has had a single rate of corporation tax (except for certain oil-related activities). This has been set at 19% since April 2017 and will remain at that rate until March 2023. However on 1 April 2023 the main rate will change to 25%. This is the first significant tax rise as a result of the Covid-19 pandemic, although we're sure it won't be the last.

To sweeten the pill, and to encourage investment in the meantime, limited companies will be able to benefit from the "Super Deduction", affording an extra 30% tax relief on many items of capital expenditure. This is covered in a separate article - Budget 2021 - The "Super Deduction"

CHANGE IN TAX RATE - SMALL COMPANIES

The headline rate isn't the full story however as companies with profits of less than £250,000 in a tax year won't pay 25% on all of their profits.

Those with profits of £50,000 or less will continue to pay 19%. Those with profits of between £50,000 and £250,000 will effectively pay 19% on the first £50,000 and 26.5% on profits above that level up to £250,000, which will result in an overall tax rate of somewhere between 19% and 25%. Tax planning will however focus for small companies on reducing profits in that band above £50k.

It should be noted however that the bands will be reduced where a company has 'associated companies'. Broadly speaking if there are multiple trading companies in a group or under common ownership then the £50k and £250k bands are divided by the number of companies. So if you have 2 trading companies each will work with bands of £25k and £125k rather than £50k and £250k.

Short accounting periods will result in reductions to the bands as well.

LOSS CARRY-BACK RELIEF

In normal times losses incurred by companies can only be carried back for offset against profits of the immediately preceding 12 months. A temporary change to this was announced whereby losses in accounting periods in 2020/21 and 2021/22 can be carried back for up to 3 years.

Decisions on whether or not to carry losses back should weigh up the short-term cash flow effect against the fact that carrying the losses forward could potentially save money in the long run, considering the increase in future tax rates mentioned above.

R&D PAYABLE CREDITS

Research and Development tax relief has become a hot topic in recent years with more and more diverse businesses submitting claims. Budget 2021 confirmed a new cap for payable credits under the small and medium sized business regime to limit claims to a maximum of £20,000 plus three times the company's total PAYE and NIC bill.

For example a company with a total PAYE/NIC bill of £50,000 will have a cap on payable R&D credits for that year of £170,000.

Please note that this does not affect companies who take the relief as a deduction in calculating taxable profits, just those who opt for a cash pay-out. It's typically loss-making companies that take the payable credits option to assist with cash flow, as companies with profits will achieve better results offsetting the extra relief against those profits.