New UK Corporation Tax Rates Effective from April 2023

Corporation tax is a tax on the profits made by companies and businesses. Since 2017, the UK rate of corporation tax has been at a historic low of 19% for all companies regardless of profit levels. However, from April 2023, the tax rates on company profits will change. Calculating the rate you pay can seem complicated and so I’m going to explain below in simple terms how to calculate your rate of tax.

What is the new tax rate for Corporation Tax?

Profits under £50,000 will be charged 19% and profits over £250,000 will be charged at 25%.

Anything in between will be charged with a marginal relief factor of 3/200.

19% is known as the small companies rate and 25% is known as the standard rate.

Marginal tax rate vs. Effective tax rate for UK corporation tax

Effective tax

Effective tax rate is the average rate of tax that is paid. This is the rate of tax paid on the entirety of your income. For corporation tax, this will range somewhere between 19% and 25%. See the chart below for an idea of what rate you’ll pay. As you can see, the effective rate rises steeper at first and tails off to 25% once it hits £250,000.

Marginal tax

Marginal tax rate is the amount that applies to earnings within a specific range. In this case, there are 3 ranges and 3 marginal rates;

• Below £50,000 – 19%
• Between £50,000 and £250,000 – 26.5%
• Over £250,000 – 25%

Despite the middle range having a higher marginal rate, the effective rate will be somewhere between 19% and 25%.

See the chart below to summarise the marginal rates below

As you can see, those companies earning over £50,000 will be subject to higher taxes that aren’t necessarily progressive as personal income tax rates are. However, as can be seen from the effective rate of tax, a company will not be charged more than 25% of their total profits.

How do you calculate the tax rate?

There are 2 main ways. You can calculate it using the marginal relief factor above by multiplying your total taxable profit by the standard rate of 25% and then subtracting the difference between the upper limit of £250,000 and your total taxable profit, multiplied by the marginal relief factor of 3/200.

e.g. assuming you made £75,000 profit.

75,000 x 25% – 175,000 x 3/200 = 18,750 – 2,625 = 16,125.

16,125 / 75,000 = 21.5%, which is your effective tax rate.

Or you can use the marginal rates. Put more simply, everything under £50,000 is charged at 19%, for every £1 earned between £50,000 and £250,000, the marginal tax rate of 26.5% is charged and everything over £250,000 is charged at 25%. If your company earns over £250,000, you can get the same answer just by multiplying by 25%.

However, it should be noted that for companies whose profits are between the small companies rate and the standard rate, the effective tax rate is somewhere between 19% and 25%.

e.g. e.g. assuming you made £75,000 profit.

50,000 x 19% + 25,000 x 26.5% = 9,500 + 6,625 = 16,125.

16,125 / 75,000 = 21.5%, which is your effective tax rate.

Summary

I hope that this has given you some insight into how the new rates of corporation tax will be calculated and an idea of what rate of tax you may be liable to pay in the future. If you have any further questions or comments, please feel free to get in touch using our contact page.