New corporation tax rates for businesses

Higher corporation tax rates could make a company’s financial situation more difficult. The new corporation tax rates for 2024 also highlight the need for business owners to understand their responsibilities.

Tradespeople who run limited companies should consider what the new corporation tax rates mean for them. However, if you run your business as a sole trader or partnership then the new corporation tax rules won’t apply to you.

What is corporation tax?

Limited companies pay corporation tax on their taxable profits. This will mainly be the trading profits from running the business.

Generally speaking, your taxable profits are the trading income after deducting allowable business expenses.

Other profits are also included in these corporation tax calculations. These may include profits on investments the company makes, or selling assets at a profit.

Can you reduce corporation tax?

You can reduce your corporation tax bill by claiming capital allowances on capital expenditure.

Capital expenditure includes buying business assets like equipment, machinery and vehicles. Capital allowances are a type of tax relief based on the value of these assets.

What are the new corporation tax rates?

From 1 April 2023, corporation tax was divided into two main rates. Before this date, there had been one main rate of 19%.

These are based on the size of taxable profits:

• Small profits rate for companies with taxable profits under £50,000: 19%
• Main rate for companies with taxable profits over £250,000: 25%

A different rate applies for taxable profits between £50,000 and £250,000. This is called marginal relief. The marginal relief rate works out at 26.5%.

Why is the marginal relief rate higher than the main rate?

This is to make sure that companies with profits over £250,000 pay 25% on all of their profits.

Look at it as a sliding scale for profits between £50,000 and £250,000 where you are paying more tax the higher your profits are between these two amounts.

The maths behind the marginal rate works like this:

• Corporation tax of 19% on £50,000 profits: £9,500
• Corporation tax of 26.5% on £200,000 profits: £53,000
• This means the corporation tax on the first £250,000 is £62,500. That’s 25% of £250,000

What about companies with accounting periods that cover the different rates?

The new corporation tax rates came into effect on 1 April 2023. If a company’s usual accounting year covers periods before and after this date they’ll have to make two calculations:

• Tax due on profits from the beginning of your normal accounting period up to 31 March 2023
• Tax due on profits from 1 April 2023 to the end of your normal accounting period

This could add to the paperwork burden for companies by having to prepare figures for two periods.

How will the new corporation tax rules affect your business?

It will probably mean more paperwork. Especially if your company’s accounting period straddles the change in corporation tax rules.

There is likely also going to be an increase in book-keeping and costs of using specialists like accountants and tax advisers.

What are the corporation tax rules for payments?

Companies have to pay corporation tax within nine months from their business year-end.

For example, if your company’s year-end is 30 June, corporation tax is due by 31 March the following year.

You could face penalties for not paying corporation tax on time.

What are the responsibilities of a company director for corporation tax?

Tradespeople who operate as limited companies are often both shareholders and directors of their business.

Company directors have a number of responsibilities, including:

• Keeping proper accounting records
• Filing company accounts with Companies House
• Submitting corporation tax returns on time to HMRC
• Making sure corporation tax is paid on time

Companies can face penalties if they miss deadlines.

Late payment of corporation tax, even by just one day, incurs a £100 penalty. Interest will also be charged daily on the outstanding amount. The current late payment interest rate is 7%.

There are penalties for late filing of company accounts at Companies House. This starts at £150 if you are a month late, then £375 if you are one to three months late. It goes up to £750 for late payments between three and six months, then £1,500 for over six months.

If you file your accounts late for a second year in a row, then these penalties will double.

HMRC can fine company directors £3,000 or disqualify them as a company director for failing to keep accounting records.

What to do if you can’t pay your corporation tax

HMRC offers payment plans if you can’t pay the tax on time. You can contact HMRC online or by phone where you can speak to a professional advisor about what steps to take.

Company dividends can’t be used to reduce corporation tax

Corporation tax is worked out on taxable profits before dividends are paid. Dividend tax rates are different from corporation tax rates.

Companies should make sure they have money available to pay the corporation tax bill before paying dividends.

A company that lacks sufficient funds to pay corporation tax but has paid dividends could be fined.

Key takeaways

• Two new corporation tax rates of 19% and 25% took effect from 1 April 2023
• Limited companies with taxable profits of less than £50,000 pay the lower rate of 19%
• The new corporation tax rules will probably add to businesses’ administrative workloads
• The rules on when corporation tax must be paid haven’t changed
• Company directors have various responsibilities regarding corporation tax

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