In the March 2021 budget, the Chancellor announced an increase in corporation tax rate from 19% to 25% with effect from 1st April 2023.

The 19% rate will continue to apply for companies with profits lower than £50,000. For those with profits between £50,001 and £250,000, the complicated ‘marginal relief’ will apply.

The idea is that companies with lower profits will not see an increase in corporation tax, but the majority of companies (from the government’s perspective) would pay 25%. The intention is not to have all companies paying 19% on the first £50,000 but to have all company profits charged at the “full rate” of tax, being the 25%.

This means that the marginal relief is based on increasing the tax proportionally on all profits not just those earning over the lower limit of £50,000.

Marginal relief is not a fun calculation and so we often put this into a simple form of a tax banding – which is probably what Rishi Sunak should have done in the budget instead of re-introducing “marginal relief”. However, the maths doesn’t not produce a picture that he probably wanted to explain.

The marginal relief means that you can break the corporation tax system into 3 tax bands from April 2023:

Taxable profits Corporation tax %
Up to £50,000 19%
£50,001 to £250,000 26.5%
£250,000+ 25%

Yes, the middle band his higher than the top band when you put this into traditional tax bands. Let’s put some numbers to this so you can see how this applies to different levels of profits…

Example One: If you have a taxable profit £50,000 tax payable

Corporation tax = £9,500

This is an effective rate of 19% of the total taxable profits

Calculation: £50,000 @ 19%

Example Two: If you have a taxable profit £60,000 tax payable

Corporation tax = £12,150

This is an effective rate of 20.25% of the total taxable profits

Calculation: £50,000 @ 19% + £10,000 @ 26.5%

Example Three: If you have a taxable profit £125,000 tax payable

Corporation tax = £29,375

This is an effective rate of 23.5% of the total taxable profits

Calculation: £50,000 @ 19% + £75,000 @ 26.5%

Example Four: If you have a taxable profit £240,000 tax payable

Corporation tax = £59,850

This is an effective rate of 24.94% of the total taxable profits

Calculation: £50,000 @ 19% + £190,000 @ 26.5%

In each example you can see how as the profit increase towards the start of the “full rate” (250,000) of corporation tax the effective corporation tax rate on all taxable profits creeps up to meet the full figure of 25%.

However, the reality of this for most of our clients will be that all profits over £50,000 almost have a very high tax cost.  If a project takes your company’s profitability from profits of £50,000 to £90,000 then on those cash flows for the project you would be looking at 26.5% of those additional profits being taken to tax.

A sobering thought no matter how much we try and soften it by looking at the overall tax rate on all profits.

It leaves us with a question, which we have been working on for a while, does salary and dividends still make tax sense from April 2023? Keep your eyes peeled over the coming weeks for our article on discussing this in detail.

If you would like to discuss the impact of the new corporation tax rate for your business and how it may impact you, contact your Principal Adviser or email discovery@a4g-llp.co.uk or call 01474 853 856.

Contact me today!

Josh Curties

BA (Hons) FCA

Partner & Principal Adviser

01474 853856

Send me a message

Share this article