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Understanding the Corporation Tax Increases for 2023

Corporation Tax is being reformed and companies with profits of more than £50,000 will pay corporation tax at a higher rate than they do now.

While the changes do not come into effect to the financial year which starts on 1 April 2023, their impact will be felt sooner where accounting periods span 1 April 2023. Consequently, they will be relevant to accounting periods of 12 months starting after 1 April 2022.

So, what are the changes?

From 1 April 2023, the rate of corporation tax that you pay will depend on the level of your profits and the number of associated companies that you have, if any.

The lower limit will sit at £50,000 and the upper limit at £250,000 for a company with no associated companies. Where a company has one or more associated companies, the limits are divided by the number of associated companies plus 1, so that, for example, the lower limit for a company with one associated company will be £25,000 and the upper limit will be £125,000.

If your profits are below the lower limit, from 1 April 2023, you will pay corporation tax at the small profits rate. At 19%, this is the same as the current rate of corporation tax.

If your profits are above the lower limit, you will pay corporation tax at the main rate. This has been set at 25% for the financial year 2023.

If your profits fall between the lower limit and the upper limit, you will pay corporation tax at the main rate, but you will receive marginal relief which will reduce the amount that you pay.

Where a company benefits from marginal relief, the effective rate of corporation tax will be between 19% and 25%. A company with profits nearer the lower limit will receive more marginal relief than a company with profits nearer the upper limit and pay tax at a lower rate.

How is marginal relief calculated?

Marginal relief is calculated in accordance with the following formula:

F x (U-A) x N/A

Where:

  • F is the marginal relief fraction (set at 3/200 for the financial year 2023);
  • U is the upper limit;
  • A is the amount of augmented profits (profits plus dividends from non-group companies); and
  • N is the amount of total taxable profits.

It pays to plan ahead!

Where the accounting period spans 1 April 2023 the profits for the period are apportioned and those relating to the period prior to 1 April 2023 are taxed at the financial year 2022 corporation tax rate of 19%, while those relating to the period from 1 April 2023 to the end of the accounting period are taxed at the relevant rate for the financial year 2023 depending on the company’s profits.

Where the company will, from April 2023 pay corporation tax at a rate above 19%, now is the time to plan ahead and, where possible, accelerate profits so that they fall in the current accounting period rather than one spanning 1 April 2023. On the other side of the coin, delaying costs so that they fall in a period spanning 1 April 2023 rather than the current period will also reduce the tax that is payable at a rate above 19%.

Here's an example:

Sample Company Ltd prepares accounts to 30 September each year.

It has annual profits of £300,000.

It’s profits for the year to 30 September 2022 will be taxed at 19%.

However, it’s profits for the year to 30 September 2023 will be time apportioned and six months’ worth will be taxed at 19% and the remaining six months’ worth at 25% -- an effective rate of 22%.

The company accelerates a profitable contract so that it is completed before 30 September so that the profit is taxed at 19%.

If you would like to find out more and discuss how you can plan ahead, get in touch.

If you own a furnished holiday letting, there are a number of advantages available to you in terms of tax which are not available to standard residential lettings.

One of the key advantages is in reference to the treatment of interest and finance costs, let me explain more…

Relief restriction for owners of standard residential lettings

Did you know that residential landlords can now only obtain relief for interest and finance costs, such as mortgage interest, as a basic rate tax reduction, regardless of the rate at which the residential landlord pays tax?

The interest and finance costs incurred are not deducted when working out the taxable profit, so the tax is initially worked out on the profit without taking account of the interest and finance costs.

The tax liability is then reduced by 20% of the interest and finance costs, capped at the lower of 20% of the taxable profit or the amount that reduces the tax liability to nil.

Any unrelieved interest and finance costs can be carried forward for relief as an income tax deduction in calculating the tax liability of the same property business in a later tax year, with the costs being relieved at the first available opportunity.

This approach has a number of downsides – relief is only given at 20% even if the landlord is a higher or additional rate taxpayer and relief may not be given in full in the tax year in which the costs are incurred.

Deduction in full for furnished holidays letting owners

The changes to interest rate relief do not apply to furnished holiday lettings, and where a let qualifies as furnished holiday let, interest and finance costs can be deducted in full when working out the taxable profit.

Unlike standard residential lettings, the deduction is not capped, and can give rise to a loss which may be carried forward and set against future profits from the same furnished holiday business.

Also, as relief is by deduction, relief is given at the landlord’s marginal rate of tax not at 20% where the landlord is a higher or additional rate taxpayer.

Here’s an example to illustrate this:

Helen is a residential landlord.

For 2021/22 her taxable profit before taking account of interest costs on the associated mortgage is £30,000.

Mortgage interest paid in the year is £8,000.

Helen has other income from her photography business and pays tax at the higher rate of 40%.

Before applying the basic rate tax reduction, the tax on the property income is £12,000 (£30,000 @ 40%). The basic rate tax reduction in respect of the mortgage interest reduces this by £1,600 (£8,000 @ 20%) to £10,400.

Mark has a furnished holiday let on which profit before deduction of interest costs is also £30,000.

He too pays mortgage interest of £8,000 and, like Helen, has other income and is a higher rate taxpayer.

However, unlike Helen, he can deduct the full amount of the mortgage interest, reducing the taxable profit to £22,000, on which tax of £8,800 (£22,000 @ 40%) is payable.

Despite identical profit and interest, Mark pays £1,600 less in tax than Helen as he is able to obtain relief for his interest costs at his marginal rate of 40%.

If you own a furnished holiday let and would like to find out more, get in touch. We can talk through this advantage and look at what other advantages may be applicable to you.

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Xena Limited 
115 George Lane 
South Woodford
London 
E18 1AB
Xena Limited
63 – 66 Hatton Garden
London
EC1N 8LE

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