Understanding Corporation Tax Rates in the UK in 2023

Understanding corporation tax rates and their implications on businesses is crucial for any company operating in the UK. Not only do these rates have a direct impact on a company’s financial health, but they also affect its competitiveness in the global market. In this blog post, we will delve into the complexities of corporation tax rates in the UK in 2023, including key changes, special tax regimes, and strategies to reduce tax liability.

From the main rate to industry-specific rates and the factors affecting taxable profits, this comprehensive guide will provide valuable information for both UK-based companies and those considering expanding their operations to the UK. Let’s begin by exploring the general overview of corporation tax rates.

Key Takeaways

• UK companies are required to pay Corporation Tax on their profits at a rate of 25%, with Marginal Relief and the small profits rate introduced in 2023.

• Factors affecting taxable profits include allowable expenses, capital gains, deductions for investment costs, R&D tax reliefs and more.

• Companies should adhere to payment deadlines or risk incurring penalties from HMRC. They can reduce liability by claiming allowances such as R&D credits and capital allowances.

Overview of Corporation Tax Rates

Limited companies in the UK are obligated to pay Corporation Tax on their profits, including gains from the sale of assets like land, property, or shares that have appreciated in value. The prevailing rate of UK Corporation Tax for companies is 25%. Keep in mind, the Corporation is a corporation. Tax rate fluctuates based on the industry and the company’s taxable profits.

Different tax rates apply to specific industries, such as oil and gas companies and the banking sector, which we will discuss in detail later in this blog post. We will now concentrate on the significant changes in corporation tax rates for 2023 and the elements influencing a company’s taxable profits.

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Key Changes in 2023

In 2023, the main rate of corporation tax for companies with profits exceeding £250,000 shall be 25%. This increase from 19% to 25% affects all UK companies, including associated companies that share common ownership or control.

To support businesses that may have substantial commercial interdependence with other companies, including associated company relationships, the Marginal Relief has been introduced for companies with profits between £50,000 and £250,000. The small profits rate, which applies to companies with profits below £50,000, remains at 19%.

These changes aim to ensure a fair tax burden for companies across different profit ranges. Businesses must stay informed about these changes and adapt their financial planning to lessen any adverse effects on their bottom line.

Factors Affecting Taxable Profits

Various factors influence a company’s taxable profits in the UK. These factors include:

• Allowable expenses

• Capital gains

• Deductions for investment costs

• R&D tax reliefs

• Capital allowances

• Diverted profits tax

Allowable expenses are costs incurred exclusively for the purpose of conducting the business and should be deducted from the company’s profits before tax. Companies can also claim capital allowances on equipment and plant for Corporation Tax purposes.

R&D tax reliefs enable companies to claim a deduction on qualifying current expenditure on R&D in excess of 100%. Additionally, the super-deduction policy allows companies to obtain a deduction that is higher than the total cost of certain investments for the period from 1 April 2021 to 31 March 2023.

Special Corporation Tax Regimes

In addition to the main Corporation Tax rate and income tax, there are special tax regimes for specific industries, such as oil and gas companies and the banking sector. These industries have unique tax rates and rules designed to address the complexities of their operations.

The upcoming sections will delve into the intricacies of these special tax regimes.

Oil and Gas Companies

Oil and gas ring fence companies operating within the United Kingdom and the UK Continental Shelf are subject to Ring Fence Corporation Tax, which is exclusively applicable to companies engaged in the production of oil and gas in these regions. The tax rate for ring-fence profits of oil and gas companies in the UK is 30%. Additionally, they face a supplementary rate of taxation of 10% on adjusted ring-fence profits.

The UK government has also introduced a new 25% Enhanced Petroleum Levy (EPL) on the profits of oil and gas companies from 26 May 2022 until 31 December 2025. Furthermore, the government has provided an investment allowance for oil and gas companies, allowing them to claim 80% relief against EPL profits. These incentives and tax rates aim to balance the financial requirements of the oil and gas industry with the need for sustainable revenue generation for the UK government.

Banking Sector

The banking sector in the UK also faces unique tax rates and rules. Here are some key points to note.

• Banks and building societies are subject to a supplementary corporate tax rate of 3% for profits exceeding £100 million.

• They also face an 8% surcharge on taxable profits. The surcharge does not apply to the first £25 million of a bank’s taxable profits. Any amount over and above this may be subject to the surcharge.

• Banks and building societies are also subject to an annual bank levy, which is imposed on certain balance-sheet liabilities and equity, such as customer deposits.

The UK government recently announced in Budget 2021 that the bank surcharge rate would be reviewed. This review was undertaken to ensure that the banking sector’s combined tax rate does not increase significantly when the rate of corporation tax rises from 19% to 25%, scheduled for 2023. This review aims to maintain an appropriate level of taxation on the banking sector while supporting its growth and stability.

Calculating Corporation Tax

Calculating Corporation. Tax involves determining the taxable profits, applying the relevant tax rate, and factoring in any applicable reliefs and allowances.

For companies with profits between £50,000 and £250,000, Marginal Relief is available to facilitate a gradual increase in the Corporation Tax rate between the small profits rate and the main rate.

We’ll explain the method for calculating Marginal Relief in the next section.

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Marginal Relief Calculation

Marginal Relief is designed to support companies with profits between the small profits rate and the main rate by providing a gradual increase in the Corporation Tax rate. The calculation of Marginal Relief involves reducing the 25% corporation tax rate by a specific formula: (U-A) x N/A x F, wherein U denotes the upper limit of profits eligible for marginal relief, A denotes the actual profits, N/A denotes the fraction of the upper limit, and F denotes the fraction of the main rate.

Companies with profits between £50,000 and £250,000 are eligible for marginal relief from 2023 onwards. This scheme is designed to benefit such businesses. This relief ensures that companies within this profit range are subject to a lower rate of corporation tax than companies with profits exceeding £250,000, helping to reduce the overall tax burden for these businesses.

Registering and Paying Corporation Tax

Companies are required to register for Corporation Tax within three months of starting to trade. Once registered, they must file Corporation Tax returns and pay their taxes on time. Various payment methods are accepted by HM Revenue and Customs (HMRC), including online and telephone banking, credit/debit card, and direct debit.

The subsequent section will cover the deadlines for Corporation Tax payments.

Payment Deadlines

The payment deadline for Corporation Tax in the UK is typically nine months and one day after the end of the accounting period. Companies with taxable profits of up to £1.5 million must pay their Corporation Tax within this deadline. For companies with taxable profits exceeding £1.5 million, payment is made in instalments.

Adherence to these deadlines is vital for businesses to evade penalties for late filing or non-payment, which could lead to interest charges and potential legal action by HMRC. Proper financial planning and timely payments help ensure smooth operations and compliance with the UK tax regulations.

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