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The Corporation Tax Changes You Need to Understand in 2023…

21st March 2023

Along with many other changes to Business Taxation, Corporation Tax is also getting a shake-up in April 2023. We briefly mentioned this update in our ‘What Numbers Are Important’ video (which you can see here: What Numbers Are Important?), but we want to take a moment to deep dive into the changes and help you understand what they mean for you and your business.

These changes were first announced back in March 2021, by the then-chancellor Rishi Sunak. 

All companies must pay corporation tax on the profits that they make. From April 2023, the corporation tax rate will rise from 19% to 25% (for companies that generate over £250,000). This means that instead of paying 19% of profits to HMRC, you now must pay one-quarter of profits if your profits are over the £250,000 threshold. However, the current rate of 19% will still apply if your company generates £50,000 profit or less. 

So, the main rates are rising from 19% to 25%. Pretty straightforward…however, smaller companies will not have to pay the full rate. It will completely depend on your level of profits for the fiscal tax year. If your company profits are £50,000 or under, the old rate of 19% will still apply. Larger companies with profits of £250,000 or over will pay the 25% rate. Between these two rates, a system of marginal relief will apply. 

How will ‘marginal relief’ work between these two rates of corporation tax?

This new system of ‘marginal relief’ is actually not entirely new, as it will work in the same way as the 2014/2015 tax year (the last time marginal relief was applied to corporation tax). With this in mind, you can use the following formula to calculate your corporate tax liability. 

Let’s use the example that your annual profit figure is £100,000.

  1. Multiply your annual profit by the main 25% rate (100,000 x 25% = 25,000)
  2. Subtract your annual profits by the 250,000 threshold (150,000)
  3. Multiply step two by the marginal rate multiplier of 3/200 (2,250)
  4. Subtract step 3 (2,250) from step 1 (25,000) = £22,750

In this example, the corporate tax liability is £22,750. This represents a tax increase of £3750 and means the rate of corporation tax is 22.75%. 

The changes to R&D Tax Credit and how corporation tax comes into play.

Alongside these changes to Corporation Tax, the Research and Development Tax Credit incentive scheme will also undergo a few changes. 

​​The changes implemented from 1st April 2023 impact the amount of relief that can be claimed, the types of activities that will qualify and the way in which businesses can claim relief. These changes have been introduced to ensure “the UK remains a competitive location for cutting edge research”, “the reliefs continue to be fit for purpose” and “taxpayer money is spent as effectively as possible”.

So, what are the numbers?

Pre-April 2023  Post-April 2023
Loss-making SME 

Enhanced deduction: 130% 

R&D credit: 14.5%

Benefit: 33.35%

 Enhanced deduction: 86%

R&D credit: 10%

Benefit: 18.6%

Profit-making SME    

Enhanced deduction: 130% 

Corporation tax rate: 19%

Benefit: (up to) 24.7%

 Enhanced deduction: 86%

Corporation tax rate: 25%

Benefit: (up to) 21.5%

RDEC Company  RDEC credit rate: 13%

Corporation tax rate: 19%

Benefit (after tax): 10.53%

 RDEC credit rate: 20%

Corporation tax rate: 25%

Benefit (after tax): 15%

It’s important to remember that the rate of Corporation Tax will differ depending on the number of profits your business generates in a fiscal tax year. 

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