Will the upcoming Corporation Tax rise affect me?

Article written by Kellands Hale, our preferred independent advice firm.

This article is not intended to be financial advice to any individual. The views expressed are those of the author and Moneyfactscompare.co.uk does not endorse the content.

In his March 2021 Spring Statement, the then Chancellor and current Prime Minister Rishi Sunak announced a six-percentage point Corporation Tax increase that would come into place this April.

Tomorrow it will come into effect and many business owners will see their Corporation Tax bill rise from 19% to 25%.

However, this rise doesn’t apply to all businesses – and will have a varied impact on different companies depending on:

• The amount your business generates in profit each year.
• If you operate a “ring fence” company. In other words, if your company makes money through oil and gas.
• Your business’s allowable expenses.

If you are a business owner anticipating a larger Corporation Tax bill from April 2023 onwards, you could be concerned about managing both your personal and corporate wealth in the coming years.

If you have questions about the impact this rise may have on your wealth, you’re in the right place. Read on to find out three key things business owners should know about the upcoming Corporation Tax increase.

Whether or not your company will see a Corporation Tax increase depends on the profits it earns over the year and if they are “ring fenced”. Remember, “ring fenced” profits refer to money that isn’t involved in the exploration for, and production of, oil and gas in the UK.

Since most businesses won’t deal with ring fenced profits, they will have to consider the following changes.

Firstly, businesses which earn more than £250,000 a year in profits will see their Corporation Tax bill rise to 25%.

Secondly, and where the new tax laws become more complicated, companies with profits between £50,000 and £250,000 a year will see a tapered increase to their tax bill. Previously, businesses earning profits between these two figures would pay a flat rate of 19%. From Thursday, this will be increased to the main rate of 25% but considers a marginal relief to your taxable amount. This means your Corporation Tax slowly increases depending on your profits.

To illustrate how this comes into effect, a business with £150,000 in annual profits will now have a Corporation Tax bill of £36,000, as opposed to £28,500 last year.

Meanwhile, businesses turning less than £50,000 in profit will see no change in their Corporation Tax bill.

If your business is set to incur a higher tax burden from April 2023 onwards, you might be searching for ways to bring your bill down.

One simple and effective way to mitigate your Corporation Tax bill is to pay as many employer pension contributions and as many National Insurance contributions (NICs) as you can.

Indeed, employer pension contributions and NICs are seen as an “allowable expense” by HMRC – meaning when you pay into an employee’s pension, the amount you spend is usually deducted from your profits when it comes to calculating your Corporation Tax bill.

As explained in one of our previous articles, matching employee pension and NIC contributions, or agreeing on a salary exchange with some key employees, could help mitigate the effects of the Corporation Tax rise.

What’s more, pension contributions and NICs are not the only allowable expenses you can utilise. Others usually include:

• Business insurance
• Stock bought with the purpose of resale
• Employee salaries
• Corporate travel expenses
• Training costs
• Accountancy fees.

Claiming these expenses when paying your Corporation Tax bill could lessen your liability and bring you peace of mind in the coming years.

Even with ample time to prepare, anticipating a six percentage point rise in your Corporation Tax bill could be worrying.

Indeed, as the COVID-19 pandemic and cost of living crisis have both had an impact on businesses in recent years, you may wish to seek further guidance from your financial planner about this additional cost.

By working closely with us you could:

• Create a bespoke fiscal plan that incorporates the upcoming Corporation Tax rise
• Make the most of allowable expenses to mitigate your bill
• Review your expenditure and cut costs if and where necessary.

What’s more, we can help you with your personal wealth. There are several planned tax increases and allowance freezes that apply to individuals as well as businesses in the coming year, including:

• The level at which earners will pay additional-rate (45%) Income Tax is decreasing from £150,000 to £125,140. This means, if you pay yourself a salary as a business owner, you may pay increased Income Tax from April onwards.
• The Capital Gains Tax (CGT) annual exempt amount is reducing from £12,300 to £6,000 in April, meaning your CGT bill could be higher this year.
• The Dividend Allowance is also decreasing from £2,000 to £1,000 in April, so you may pay higher Dividend Tax if you take them as part of your remuneration.

To effectively plan for the impact of a rising Corporation Tax bill, and update your personal financial plan too, get in touch today. Email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate cashflow planning.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.