In April 2023, the UK Government introduced a tiered system for Corporation Tax, making it more flexible and supportive for businesses at different stages of growth. This also brought the reintroduction of the Small Profits Rate, which reduces the tax rate specifically for smaller businesses.
What is the Small Profits Rate?
The Small Profits Rate is a lower Corporation tax rate of 19%. It applies to companies whose augmented profits do not exceed £50,000 in a financial year. If your business falls into this category, you will pay less tax than larger companies. This lower rate gives small enterprises breathing room by allowing them to reinvest more of their earnings back into the company.
Additionally, this reduced rate shields smaller businesses from the impact of the main Corporation Tax rate increase to 25%, which took effect in April 2023.
Augmented Profits
To assess eligibility for the Small Profits Rate or Marginal Relief, you must consider augmented profits. These include your company’s taxable profits plus any exempt dividends received from non-group companies, such as companies not part of a 51% group relationship.
Incorrect calculations of augmented profits may result in underpayment or overpayment of tax and could also lead to penalties.
Corporation Tax Changes
Before April 2023, all business paid the same flat Corporation Tax rate of 19%. Under the new system, there are now three Corporation Tax bands:
- Profits up to £50,000 are taxable at the Small Profits Rate of 19%
- Profits between £50,001 and £250,000 are taxable at the main rate of 25% but are eligible for Marginal Relief
- Profits above £250,000 are taxable at the full rate of 25%
This new structure introduces a more progressive approach, ensuring that smaller businesses pay less tax while larger and more profitable companies contribute more.
Marginal Relief vs Small Profits Rate
You qualify for Marginal Relief if your company’s augmented profits fall between £50,001 and £250,000. This relief gradually increases your effective Corporation Tax rate as profits grow, rather than immediately jumping from 19% to 25%.
The effective marginal tax rate on profits in this band is approximately 26.5%, due to the tapering of the relief. Marginal Relief bridges the gap between the Small Profits Rate and the main rate.
This prevents a sudden hike in tax bills as the company grows beyond the £50,000 threshold. Use the Marginal Relief Calculator on GOV.UK to help determine your effective tax rate.
Associated Companies and Threshold Adjustments
If your business is part of a group or has other companies under the same ownership, you will need to adjust your profit thresholds. The £50,000 and £250,000 thresholds are divided by the number of associated companies plus one.
For example: If your company has two associated companies, your Small Profits Rate threshold reduces to £16,666 and your main rate threshold reduces to £83,333.
You must also time-apportion these thresholds based on time, if your accounting year spans the rate change on 1st April 2023.
Split Financial Years
If your accounting period spans the 1st April 2023 tax rule change, you must split your financial year into two parts:
- The period ending 31st March 2023 (old tax rules)
- The period starting 1st April 2023 (new tax rules)
You must calculate your Corporation Tax based on the rules applicable in each period. Additionally, the profit thresholds must be time-apportioned. So if your accounting year runs from 1st January to 31st December 2023, you will need to adjust the thresholds based on how many days fall into each part of the year.
If you also have associated companies, you must apply both time and company-based apportionment to your thresholds.
Companies That Cannot Use the Small Profits Rate
Some companies cannot claim the Small Profits Rate. These companies must pay the full 25% Corporation Tax rate, regardless of their profit levels. Excluded companies include:
- Non-resident companies without a UK permanent establishment
- Close investment-holding companies which usually exist for passive investment rather than trading
These exclusions ensure that the Small Profits Rate only applies to active UK-based trading businesses.
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