For the past 40 years or so, corporate tax rates have decreased steadily around the world. In 1980, the global average stood at around 40%, but by the end of 2020 it was closer to 24% as countries aimed to encourage business investment. In the UK, we’ve seen the main rate of corporation tax cut from 28% in 2010 to its current rate of 19%. Plans were originally in place to reduce it even further to 17% in 2020, but those were cancelled at the end of 2019. 

Following the COVID-19 pandemic, as governments around the world look to cover the costs they’ve incurred, company tax rates could now be about to go in the opposite direction. In Spring Budget 2021, Chancellor Rishi Sunak announced that the UK’s main rate would increase to 25% from April 2023, except for those small companies making less than £50k in taxable profits who will see a small-profits rate of 19%. 

As Sunak presented it, this increase is a kind of trade-off for the financial support given to businesses during the COVID-19 pandemic… “UK businesses have received more than £100 billion in Government support, so it is ‘fair and necessary’ to ask them to contribute to our recovery”. 

Changes from April 2023

So, from the 2023/24 tax year, the main rate of corporation tax will increase to 25%. The Institute for Fiscal Studies (IFS) called this a rise of “historic proportions”, taking revenues from the tax well above their 2010 level. 

For profits up to £50,000, however, a small-profits rate of 19% will be introduced. Only those with profits over £250,000 will pay at the main rate, and profits in between the two rates will be charged at a tapered rate. 

While the increase to the main rate is softened by the small-profits rate, it will still affect around 30% of currently trading companies and is expected to raise £17.2bn by 2025/26. As Sunak noted in his speech, the UK will still have the lowest corporation tax rate in the G7, but it will fall around the middle of rates in the OECD. 

Broadly this does see a good balance, but there are some concerns around the complications it could create for companies whose profits fall between the £50,000 and £250,000 thresholds.

The key for many owner managed businesses is the impact on their personal incomes.  Whilst CT rates are at 19%, the overall tax take from dividend income is very slightly better than taking PAYE income with EE’s and ER’s NIC, as there would only be a 19% tax deduction for the salary cost.  Once Corporation tax rates hit 25%, the situation shifts so that PAYE salary will become slightly more tax efficient than a dividend payment.

Simple if you are firmly in the 19% or 25% bands, but for those that may sit in the middle, or move between the bands in good or bad years, the situation becomes more complex.  Short answer, review your remuneration planning to make sure you understand what will be best for you in the future and as we transition towards it.

Super-deduction

It wasn’t all bad news for companies in Rishi’s Budget, as the Chancellor announced a new ‘super-deduction’ in an attempt to encourage capital investment. Between 1 April 2021 and 31 March 2023, companies that invest in qualifying new plant and machinery assets will benefit from a 130% first-year capital allowance. This will allow them to effectively cut their tax bill by up to 25p for every £1 they invest. For example, a company that invests £10m in qualifying assets could deduct £13m in the first year alone, adding up to a tax saving of £2.47m – compared to a saving of £497,800 without the super-deduction. Limited companies will also benefit from a 50% first-year allowance for investing in qualifying special-rate assets, including long-life ones. 

Combined with the reliefs offered by the eight freeports (which of course included Plymouth) announced in the Budget, and existing capital allowance measures such as the annual investment allowance of £1m, the Treasury said this takes the value of the UK’s capital allowance regime from 30th in the OECD to first. The Office for Budget Responsibility called the super-deduction the “most significant contributor to the economic recovery measures”, and predicted it will boost business investment by approximately 10%, equivalent to around £20bn a year.

The message for most businesses is therefore… “If you want to pay less tax – Invest”,

If you have any questions or need any help with your corporation tax, just give us a call on 01752 220979, we’re happy to help.