Corporation Tax Rises – What Does It Mean For You?

Earlier this year the chancellor announced an increase in corporation tax rates from 19% to 25%. A fairly significant increase! yuk…


I think we were all expecting something with the extreme COVID relief money splashing around last year. Furloughs, grants, loans and much more all need to be paid back.


So what exactly does it mean for you as a small business owner?


Well luckily if you are a small business earning less than £50,000 in profits you will continue to pay 19% corporation tax, hooray! (The government reckons that’s about 70% of all businesses BTW)


However, if you’ve got a business making more than £250k in profits you’re going to be subject to the new corporation tax rate of 25% starting from April 2023.


What happens if you sit somewhere in the middle?


The government has introduced an effective rate of 26.5% for profits between £50,000 and £250,000… wait what!? Isn’t that more than the 25% rate for profits over £250k?? 


Yes, that’s because the £50k rate isn’t an ‘allowance’ like we see with income tax. 


So the 26.5% rate makes the correct adjustment to ensure businesses making over £250k pay an equivalent of 25%.


Let’s look at a quick example:


Your first £50,000 is taxed at 19%

= £9,500


Your next £200,000 is taxed at 26.5%

= £53,000


Total £62,500 which is 25% of £250,000


Alright, so how can you reduce your corporation tax liability?


It becomes a more important question than ever now when the rate is so significant…


Now might be the right time to increase spending in your business. Staffing costs, offices and consumables are all tax-deductible.


Unfortunately, the super deduction no longer applies from April 2023, but certain things like the electric car first-year allowance still do.


In other words, if you went out and bought a qualifying electric car (zero emissions) you’d get a 100% allowance in the first year. (the chancellor has confirmed this will run until 2025) allowing you to effectively write off the total cost of the car as soon as you buy it.


Let’s look at a quick example:


If your company made £100,000 profit. You’d pay £50k @19% and then £50k @ 26.5%


If you went out and bought a Tesla for £50k you’d be dropping back into the 19% only corporation tax bracket and effectively saving £13,250 in tax. Nice.


Another way to reduce your tax bill is to invest in staff training.


Being 100% tax-deductible now might be a great time to upskill your staff. Send them away on a course or bring a certified trainer into your offices.


Then there are other small savings like:


  • Business mileage
  • Home office allowances
  • Staff party
  • Upgrading your accountant to RJF… 🙂 

Will all have an impact on your taxable profits.


In the next article, we’ll do a deep dive into using pensions as a great way for small business owners to save money on tax. 


Stay tuned!