A Quick Guide To Corporation Tax Rates

Do you know what rate of Corporation Tax your business should be paying?

The main rate of Corporation Tax is 25 per cent for the most profitable businesses.

The effective amount of Corporation Tax that is due will, however, rely on the taxable profits your company makes as follows:

  • Small companies with profits of up to £50,000 pay Corporation Tax at 19 per cent.
  • Companies with profits of £250,000 and over pay Corporation Tax at 25 per cent.
  • Companies with profits over £50,000 but under £250,000 pay Corporation Tax on a sliding scale of between 19 per cent and 25 per cent

Understanding Marginal Rate Relief

For those with taxable profits below £50,000, who benefit from Small Companies Relief which reduces the rate of Corporation Tax to 19 per cent, and those with profits above £250,000, that pay the top 25 per cent rate of tax, the rules are quite simple.

However, where companies have taxable profits between these two thresholds, matters become a little more complicated as the rate of tax they pay will depend on their level of profit.

This is due to Marginal Rate Relief (MRR). This is a tapered relief, which increases in line with a company’s profits.

The basic method used by HM Revenue & Customs (HMRC) to calculate this relief is quite complex. In reaching a final figure, this calculation must consider:

  • A company’s profits, including Franked Investment Income (FII), which is generally derived from dividends from other companies;
  • Basic profits, which are a company’s trading profits and gains; and
  • The Marginal Rate Relief fraction (3/200ths).

However, to simplify this we can eliminate FII, which many smaller companies won’t be affected by, to create a set of tax rates as follows, which apply to each band of profit:

Profit Band Marginal Rate
£0 to £50,000 19%
£50,001 to £249,999 26.5%
£250,000 plus 25%

 

This is an overly simplified expression of how this relief works and the actual effective rate of tax will vary based on taxable profits.

For example, let’s take a business with £150,000 of taxable profits and break this down into the actual effective rate of tax:

The effective rate of tax is, therefore, the rate that applies to the whole of the profits, providing a quick and effective calculation for assessing how MRR affects your future tax bills.

 

Taxable Profit Slice Corporation Tax Rate Tax Due
£50,000 19% £9,500
£100,000 26.5% £26,500
Total Taxable Profit EffectiveTax Rate Total Tax Due
£150,000 24% £36,000

 

If you require further assistance in calculating the level of relief you are entitled to if your profits are between £50,000 and £250,000, HMRC has provided an online calculator to help you work this out.

However, for this calculator to be effective you need a clear picture of your taxable profits, which is best sought from an experienced tax adviser.

How are group companies affected by Corporation Tax?

Lower and upper limits are proportionately reduced for short accounting periods and where there are associated companies.

A company is considered to be associated with another company if it is at any time in the preceding 12 months:

  • A company has control of the other company.
  • The companies are under the control of the same person or group of persons.

The previous 51 per cent group company test under the Corporation Tax Act 2010 has been repealed and replaced by the associated company rules.

If you operate a group of companies or are within a group of companies and want to understand how you are affected, it is best to seek independent professional tax advice.

Need help?

If you need help calculating or reporting Corporation Tax for your company, please contact us.