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Corporation Tax – What are my options?

For a long time now, corporation tax has been one of the simpler parts of the UK tax system to explain and understand.

Since 2017, all companies paid the same 19% rate on their taxable profits, no matter how small or large these profits were. However, since the last budget announcement this is no longer the case.

Make sure to check out our previous blog post where we explain the new rules. We’ll also be discussing the changes in more detail and sharing some handy tips on how to handle your CT liability.

Associated Companies

Two companies can be deemed ‘associated’ if they’re under the control of the same person (or persons). Further, where there is ‘substantial commercial interdependence’ between two associated companies, the rules are more complex.

The reason this matters is that the £50,000 and £250,000 thresholds are divided by the number of associated companies. For example, if you control two companies, then they will each have thresholds of £25,000 and £125,000. Each company will therefore begin paying a higher effective rate of corporation tax sooner than a company with the same amount of profit, but no associates.

Investment Companies

If you have a ‘Close Investment Holding Company’ (CIHC), then neither the small profits thresholds nor the tapered introduction of the main rate will apply.

In short – all of the CIHC’s profits will incur corporation tax at 25%. Further, a CIHC may still be considered an associate of a trading company, and so carries the potential to affect the corporation tax paid by any trading company you may also have.

Marginal Tax Rate

For both the small profits rate and the tapered introduction of the 25% main rate to apply, a 26.5% marginal tax rate is charged on profits between the thresholds. Assuming no associates, a company will therefore pay 19% tax on its first £50,000 of profit, before then paying 26.5% on each £1 earned up to £250,000, when the 25% rate kicks in.

This is arguably the most important factor to keep in mind, since companies with earnings in this middle ‘band’ will be subject to the highest effective tax rate as their profits increase above the lower threshold.

Okay, so what can I do about it?

Unfortunately, not a huge amount! However, we’ve put together a few ideas on areas to consider if you’re looking to manage your corporation tax liability.

Multiple Companies

Do you have two or more (non-dormant) companies? If so, then now may be a good time to think about either merging their activities, or closing any which no longer trade very actively.

In doing so, you run less risk of one or more of your actively trading companies from having its profit thresholds squeezed, adding unnecessarily to its corporation tax bill.

Timing Expenses

Picture the scenario: you’re nearing the end of your company’s current accounting period, and have just agreed a lucrative new contract that’s likely to increase the company’s profits significantly in the next year.

So when’s best to purchase that expensive new equipment that you’ve been thinking of buying for a while, and might be needed for the new contract?

The next accounting period of course, since this is when the company’s corporation tax burden is likely to be highest.

Whilst this is just an example, the same logic applies to all company expenditure. If an expense is non-urgent, and you’re aware that the company’s profits are likely to vary year-on-year, perhaps take time to consider when is best to make the transaction.

Pension Contributions

A key announcement in the Chancellor’s spring budget was that the annual allowance for pension contributions would be increasing to £60,000 (up from £40,000 in prior tax years). Hence, if you haven’t already, now could be a good time to look into making pension contributions from your limited company.

Coupled with these corporation tax changes, there’s the potential for limited companies to make a sizeable saving, whilst also enabling directors to save towards their retirement – a win-win situation!

Benefits in Kind

For most circumstances in the past, we would have advised against putting taxable benefits through the company. As well as adding to the both the company’s and the individual’s tax liabilities, they’re usually an admin faff and so were best avoided.

However with these changes, there’s an opportunity to reduce the company’s tax bill, since both the cost of the benefit and employer NICs charged in relation are eligible for corporation tax relief. Whilst the director(s) will have some income tax to pay, they’ll also benefit from not having to pay for a ‘perk’ directly.

Common taxable benefits include:

  • Electric Vehicles (risen in popularity over the past few years, and tend to be tax-efficient regardless of all the above)
  • Private Healthcare/Insurance
  • Memberships (e.g. for a gym/social club)

With this, please note that from the current tax year (23/24) onward, we will be charging a £199+VAT standalone fee for assisting (i.e. to prepare and file P11D submissions for a company). However as outlined above, this may still be something to consider if it goes towards reducing the company’s overall tax bill.

What are my next steps?

Firstly, it’s best not to rush into any decisions before carefully considering the above. Have a read through, and if you have any questions, don’t hesitate to get in touch with us.

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