The rate of Corporation Tax your business pays may have changed for the 2023/24 tax year. It could affect your profit margins and long-term plans, so it’s crucial you understand what the new rates could mean for your business.
After a series of announcements and U-turns in 2022, you may not be fully aware of the changes to Corporation Tax.
Last year, former chancellor Kwasi Kwarteng said he was reversing a planned Corporation Tax hike, and would, instead, be slashing the rate. Like many changes announced in the mini-Budget, this was quickly backtracked. With Rishi Sunak as prime minister, the previously announced rise in Corporation Tax went ahead at the start of the 2023/24 tax year.
So, what do the changes mean for businesses?
Corporation Tax rises to 25% for some businesses
While Corporation Tax has increased for the 2023/24 tax year, it isn’t something that will affect all businesses. The rate of Corporation Tax that a business will pay depends on its profits.
For 2023/24, Corporation Tax rates are:
- 19% for small businesses with profits of less than £50,000
- 25% for businesses with profits above £250,000
- Businesses with profits between £50,000 and £250,000 will be subject to a tapered rate.
As limited companies pay Corporation Tax on their profits, you calculate it after deducting salaries and other business expenses.
If you use dividends to supplement your income, you should note Corporation Tax is calculated before dividends are deducted. So, it’s worth considering how you take an income, as this could affect your tax liability.
For some businesses, the new Corporation Tax rate could mean the amount of tax they pay in 2023/24 is significantly higher than in previous years.
A company with profits of £300,000 in the 2022/23 tax year would have paid £57,000 in Corporation Tax. For 2023/24, their bill would rise to £75,000.
The government said despite the hike, the new 25% rate is the lowest in the G7. It’s estimated the increase will boost Treasury coffers by around £18 billion a year.
4 useful ways businesses could reduce their Corporation Tax bill
The Corporation Tax rise means it’s the perfect time to review your business’s finances and understand if you’re operating as efficiently as possible. There may be steps you could take to potentially reduce the amount of tax the business pays.
1. Claim all business expenses
You can deduct allowable expenses from your Corporation Tax bill. This covers the running costs of your business, from purchasing raw materials to paying employees.
So, going through your accounts and records to ensure you’re not missing anything could reduce your Corporation Tax bill. Even small expenses can add up to reduce your bill or even mean you could pay a lower rate.
In some cases, businesses may also choose to increase spending in some areas, so they can offset the costs against their Corporation Tax bill. For instance, you could invest in employee training programmes to develop skills in your workforce in a tax-efficient way.
2. Increase pension contributions
Pension contributions are classified as allowable business expenses. So, you can deduct pension contributions from company profits before you calculate Corporation Tax.
As a result, boosting pension contributions could reduce the amount of tax your business pays and secure your long-term finances. If you have employees, increasing pension contributions could also help retain staff and attract new talent.
3. Claim capital allowances
If you buy assets that you keep to use in your business, such as equipment or business vehicles, you may be able to deduct some or all of the value from your profits before you pay tax under capital allowances.
There are several different types of capital allowances; if an item qualifies for more than one, you can choose which one to use. So, it’s important to understand what the different options are, and which ones could be right for you. Please contact us if you have any questions.
4. Claim research and development tax reliefs
To encourage businesses to invest in research and development (R&D), there are generous tax reliefs available that you may be able to take advantage of.
To claim R&D tax relief, the work must be part of a specific project to make an advance in science or technology. If your project is eligible, you could claim tax relief of up to 33% on your R&D expenditure.
Contact us to talk about your business finances
Depending on your business and circumstances, there may be other steps you could take to reduce Corporation Tax. Please contact us to discuss your business and how the changes could affect your long-term finances.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.