The planned increases to Corporation Tax Rates and what these mean for small business owners.

Who will be affected?

The corporation tax ‘main rate’ (currently 19%) is scheduled to increase considerably to 25% by April 2023. A new ‘small profits rate’ is also being introduced for business which make less than £50,000 profit a year. The main rate will be applied to businesses making more than £250,000 profit a year, with a ‘tapering’ of the two rates between these amounts.

Those companies under this lower £50,000 threshold will find themselves relatively unaffected by the new measures.

Businesses which find themselves between these rates will arguably be affected worst, having smaller profits to pay the extra tax from. For these companies, particularly which find themselves just over each of the limits announced, or indeed the tapering limits yet to be confirmed; additional tax planning will become an essential exercise going forward. Fortunately, these same companies will have more options available in this regard, one such option is detailed in the next section.

Companies which earn much more than the £250,000 have found themselves on the rough end of this measure, suffering the brunt of the changes but may still have a potentially invaluable lifeline to reduce their tax bills in the years before the main rate goes up.

Action to take once the new rates come into force

Companies making profit above these thresholds can’t simply leave more money in the company and declare less profit, these so called ‘retained earnings’ would still count towards the annual profit a company makes and as such be liable to corporation tax.

One possible solution is to increase the salaries payable to the company’s directors and employees, thereby reducing the profit made by the company. A rather obvious drawback to this solution is that the individual is then likely to have an increased tax burden.

What then is a better solution? A pension contribution made by a company; an ‘employer contribution’, is a type of business expense which is deductible for corporation tax purposes. The added benefit this time is that as it isn’t being paid directly to the individual, income tax is only due on the individual when these benefits are withdrawn in retirement, typically when other taxable income has reduced. This solution is particularly beneficial to older business owners, who may have little or no time left before being able to access their pension funds.

‘Super deduction’?

In the 2021 Budget the Chancellor of the Exchequer has introduced a short-term measure, offering a tax reduction to companies ahead of the planned increases to corporation tax rates.

This will be available from 1 April 2021 until 31 March 2023 and offers a tax reduction for companies of a whopping 130% of the cost of qualifying plant and machinery investments. This reduction will not be able to reduce a company’s tax bill beyond its liability, i.e., the extreme case is nil tax due, not a negative or refund amount.