How is Corporation Tax calculated?
Companies are required to pay corporation tax on their taxable profits. This can consist of trading profits, investment income, and chargeable gains.
Expenses that relate solely to the company’s trade will be a tax-deductible expense.
Adjustments to the accounting profit
The accounting profit needs to be adjusted to produce the tax-adjusted profit. The adjustments will add back any disallowable expenses and deduct capital allowances. Capital allowances can be claimed for assets that have a useful life of two years or more.
Some of the more common disallowable expenses are:
- Client entertainment
- Fine and penalties
- Certain legal costs
- Accrued pension contributions
Any trade losses brought forward can be offset against the tax-adjusted profit and therefore reduce the corporation tax liability.
The rate of corporation tax
The tax-adjusted profits are then taxed at the following rates:
- For the year ended 31 March 2022 – 19%
- For the year ended 31 March 2023 – 19%
However, new rules are set to come into effect from 1 April 2023, and for some companies, the rate of corporation tax will increase to 25%. The change only applies to companies that exceed the ‘upper profits limit’ which is set at £250,000. Companies whose profits do not exceed the ‘lower profits limit’, set at £50,000, will pay at the small profits rate which is currently 19%.
Companies whose profits fall between the lower and upper-profit limits will pay corporation tax at the main rate (25%) and then marginal relief is deducted. Marginal relief is calculated using a specific formula, which is adjusted depending on the company’s total income and the number of associated companies.
The lower and upper profits limits are reduced proportionately where the accounting period is less than 12 months and where a company has one or more associated companies.
Therefore, companies with the taxable profits as below will have the following corporation tax liabilities;
|Tax adjusted profits||£50,000||£150,000||£250,000|
|Corporation Tax before 31 March 2023||£9,500||£28,500||£47,500|
|Corporation Tax after 1 April 2023||£9,500||£36,000||£62,500|
When a company’s accounting period straddles 1 April 2023, the profits are apportioned and the profits falling in the period prior to 31 March 2023 will be taxed at 19%, and the profits falling after 1 April 2023 will be subject to the new changes.
Key things to think about before the changes come
Therefore, if you are intending to incur large expenses and it’s possible for these to be held off, it would be beneficial to incur them on 1 April 2023 or later in order to reduce the liability when the corporation tax rates are higher.
In addition, if the company has losses it may be best to carry these forward to offset against future profits instead of a carry back claim.
For more information and advice on how corporation tax is calculated, speak to our corporate tax advisors today. Or, to learn more, discover how long you need to keep corporate tax records for.