The rate at which corporation tax is charged is scheduled to increase from 1 April 2023. The rate will increase to 25% for companies whose taxable profits exceed £250,000. For companies with profits of less than £50,000, the current 19% rate will still apply.
Companies with taxable profits between £50,000 and £250,000 will pay tax at the 25% rate reduced by a marginal relief such that overall, they will pay on a sliding scale between 19% and 25%. (However, please see associated companies rules below)
Companies whose accounting periods end soon after April 2023 will pay a pro-rated corporation tax rate.
The upper and lower limits for taxable profits are reduced depending on the number of ‘associated companies’, the taxable profit limits being divided equally among all the associated companies.
This means that if there are 2 associated companies they will pay 25% on profits of £125,000 and above ( being half of the rate of £250,000) and will move out of the 19% rate once the profits reach £25,000 each rather than £50,000.
It is therefore, extremely important to explore the relationship between companies in which you own shares, the likely profit levels in each and whether action can be taken now to avoid paying more tax than necessary after April 2023.
Please note that dormant companies and some non trading companies are exempt from this test. If you have one of these, do get it checked.
What is an associated Company?
Broadly a company is associated with another company if at any time within the preceding 12 months one company has control of the other or if both are under the control of the same company or person or persons. It can also include companies where you have a right to acquire shares in the future. This is a complicated area and you should seek advice if you are unsure if you have associated companies.
Meaning of ‘control’
A person is treated as having ‘control’ if they can exercise control over the company. This normally comes with owning more than 50% of the share capital but there are other considerations.
In some circumstances the rights and ownership of other people can be attributed to you and combined with your shareholding. This is most common with spouses or partners but can also include:
- any spouse or civil partner of, any parent or remoter forebear, any child or remoter issue, or any brother or sister
- any partner
- the trustees of any settlement of which you, or any relative of yours (living or dead), is or was a settlor
this is not an exhaustive list and there are more examples.
As an example, if you own 40% of the shares in a company and your partner owns 20% these shareholdings are added together and you are judged as having control as jointly you own 60%.
The control test is concerned solely with the shareholders’ ‘share’ power or voting power as well as rights to the majority of distributed income and/or rights to the majority of the assets in a winding up.
If you are affected by the above you must take professional advice to assess your company’s situation before taking action. We are here to help so do get in touch with us at Maynard Johns.