When do I need to make the first 25% Corporation Tax payment?

100 Days to the Corporation Tax Cliff Edge

The clock is ticking for those with March year-ends.

If you have a March 31st year-end (which is the case for over a quarter of all UK businesses), you will need to make the first payment of the increased 25% Corporation in just 100 days – 1st January 2025. Happy New Year!

The increase in Corporation Tax is not merely a percentage change; it represents a pivotal moment that could reshape the financial landscape for countless businesses.

In May, Parliament published its latest figures on tax revenues for the fiscal year 2023/24. As anticipated Income Tax, National Insurance and VAT claimed the top three spots. However, we saw a staggering 16% rise in Corporation Tax revenue, amounting to £103 billion.

This surge represents the largest single-year increase among all tax categories. Historically, Corporation Tax has contributed just over 2% to the GDP. The current rise pushes this figure closer to 4%, signalling a significant fiscal shift. This trend is expected to continue in the 2024/25 tax year when we see the effects of the increase from 19% to 25%.

“The Most Significant Impact Is Yet to Be Felt”

Josh Curties BA (Hons) FCA, Partner at A4G Chartered Accountants says:

“The primary concern here is the economic impact, with an additional 6% being siphoned from the economy due to the tax hike. Despite inflation rates returning to more typical levels, those with limited companies will see a new inflation problem caused by the impact of the Corporation Tax rise.

While this tax is relating to year ends ended 31 March 2024, often businesses rely on the cash generated from trade post year end to secure the tax money.  Therefore, the most significant financial impact is yet to be felt.”

Emma White FCA, Partner and Head of Advisory at A4G Chartered Accountants says:

“It concerns me how little awareness is being raised on this issue. Our clients and contacts know I’ve been passionate to outline the real impact this has on businesses from the announcement back in 2023, trying to ensure it is being built into the financial strategy of every business for 2024 and 2025. I hate the idea any business would fail from a lack of awareness of these steep increases in company tax.”

The Financial Reality

Let’s put some numbers to the impact of this:

For a company with a turnover of £1,250,000 and a 20% profit margin, the after-tax profit (to fund dividends and investment) currently stands at £250,000.

To maintain this profit, the same company would need to increase its turnover by 5.5%, reaching £1,318,935, assuming other costs remain constant. However, in reality, costs will likely rise, necessitating an even greater increase in turnover.

We projected for the years 2023 and 2024, businesses will in fact need to increase their turnover by 24% just to standstill.

What Is Your REAL Break Even Point?

To help assess the increase in turnover needed for your business (whether it’s 5.5% or potentially even higher), we would recommend completing a ‘REAL’ break even point calculation.

A real break even point calculation goes beyond the traditional break even analysis which shows how much turnover is needed to make a profit.

Real break even point indicates how much turnover is needed not just to cover company expenses, but what the owner needs to draw from the business to cover their lifestyle, factoring in taxes on both dividends and profits.

With inflation hovering around 2%, simply raising prices to achieve a 5.5% increase in turnover is unrealistic for most businesses. Therefore, you must explore alternative strategies to counteract the Corporation Tax cliff edge.

Strategies to combat the ‘Corporation Tax Cliff Edge’

• Optimise Your Pricing
• Renegotiate terms on suppliers that are a ‘cost of sale’ item
• Improve productivity of your employees and processes
• Explore how automation and AI can help
• Assess product lines, based on “contribution” or margins, and cull the worst performing areas
• Expand operations and capacity
• Explore tax reliefs for your industry
• Consider offshoring aspects of your office staff

We can’t give a silver bullet, but we can help trigger thought and discussion.

The countdown to 1^st January 2025 has begun. Over the next 100 days, we will share insights and strategies on how to navigate this challenge.

For personalised strategies and immediate assistance, our Principal Advisers are available for strategic planning sessions. Often, the solutions lie within your existing knowledge, and we can help uncover them by asking the right questions.

Email enquiries@a4g-llp.co.uk, or call 01474 853 856 to book your free 1-2-1 consultation today.