Corporation Tax Changes coming for Limited Companies in 2023

At UK Postbox, a considerable section of our customer base own businesses, including sole traders, private limited companies and more. For those customers that own limited companies, you may have heard of a change being made on the amount of corporation tax you will need to pay in the future. In the following article, we will explore what these changes to corporation tax will look like, why they have been introduced and what kind of impact they will have on the world of business in the UK.

What is Corporation Tax?

Corporation tax is applied to all profits businesses make within a financial year. This is a legal UK requirement and applies to:

• A limited company
• Any foreign company with a UK branch or office
• Any form of unincorporated association or club 

• For example, a sports club or community group

In terms of what is defined as a taxable profit, you must pay Corporation Tax on the money your company makes from:

• Any/all trading profits
• Investments
• Chargeable Gains (when an asset is sold for more than it costs)

If you have a UK based business, you must pay Corporation Tax on all of your profits from the UK and abroad. However, if your business is not based in the UK but instead owns a branch in the UK, then your business will only pay corporation tax on the profits made from its UK activities. 

For more information on how to work out, pay and record your corporation tax payments, you should read GOV.UK's guide to corporation tax here.

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What is the current Corporation Tax rate?

The current corporation tax rate for limited companies in the UK is 19%. This, however, is set to change for many businesses from the beginning of April 2023.

The Changes to Corporation Tax

Chancellor Rishi Sunak recently announced changes to the amount of corporation tax paid by limited companies in the UK, starting from the beginning of April 2023. Broadly speaking, the rate of corporation tax paid will be increasing from 19% to 25%. However, these changes will not affect all businesses, and there are a few considerations and protections that have been made to accompany these changes:

• The changes to corporation tax will be introduced in April 2023.

• This new rate will be paid in full by companies whose profits exceed £250,000. 

• Smaller limited companies will not be included in this increase. If your business operates with profits of £50,000 or less, then you will instead continue to pay the current rate of 19% on a small profits rate (SPR).

• If your company's annual profits lie somewhere between £50,000 and £250,000, the total amount of corporation tax you will pay will be determined by a new system of tapered relief.

• It has been estimated by the HM Treasury that around 70% of companies operating in the UK will continue to pay the current 19% taxation rate, and around 10% of companies will pay the full new 25% rate.

Why has Corporation Tax increased?

The reason behind increasing corporation tax is to "balance the need to raise revenue while having an internationally competitive tax system" (Chancellor Rishi Sunak). The new system won't be in place until 2023 to allow businesses a recovery period due to the economic strains brought on by the COVID-19 pandemic.

As well as the Corporation Tax increase, plans were announced for a new two-year tax for businesses who invest in new machinery. These companies will receive a tax cut that is worth 130% of investments made between 1 April 2021 and 31 March 2023, a deduction that will be worth £25bn over two years to businesses.

These changes are set to have a considerable impact on the finances of limited companies from 2023 onwards, particularly for the larger businesses that currently achieve profits of over £50,000. If you would like to read up on this topic further and remain in the loop of any potential future developments, we would highly recommend that you follow the GOV. UK's page dedicated to these corporation tax changes.