The corporation tax rules are changing from 1 April 2023, and the amount that a company will pay will depend on the level of its profits, and also whether or not it has any associated companies.
Briefly, from 1 April 2023, companies with profits below the lower limit will pay corporation tax at the small profits rate of 19%, while companies whose profits exceed the upper limit will pay corporation tax at the main rate of 25%.
Where profits fall between the lower limit and the upper limit, corporation tax will be paid at the rate of 25%, as reduced by marginal relief.
For a company with no associated companies, for a 12-month accounting period the lower limit is £50,000 and the upper limit is £250,000. Where a company has associated companies, the limits are divided by the number of associated companies plus one. The limits are also proportionately reduced where the accounting period is less than 12 months.
The following table shows the limits for companies with zero to five associated companies:
|Number of associated companies
What is an associated company?
A new definition applies from 1 April 2023 to determine whether a company is an associated company for the purposes of the new corporation tax rules. For these purposes, a company is an associated company of another at any time when:
- one of the two has control of the other; or
- both are under the control of the same person.
However, a company is ignored in determining the number of associates that a company has if it has not carried on a trade or business at any time in the accounting period or if it was an associated company for only part of the accounting period and has not carried on a trade or any business during that part of the accounting period.
Meaning of ‘control’
The definition of ‘control’ is that which applies for the purposes of the close companies rules.
Under this definition, a person is treated as having control over a company if that person exercises, is able to exercise or is entitled to acquire direct or indirect control of the company’s affairs. In particular, a person is treated as having control of a company if the person possesses or is entitled to acquire:
- the greater part of the share capital or issued share capital of the company;
- the greater part of the voting power in the company;
- so much of the issued share capital of the company as would, on the assumption that the whole of the income of the company were distributed among participators, entitled that person to receive the greater amount so distributed; or
- such rights as would entitle that person, in the event of the winding up of the company or in any other circumstances, to receive the greater part of the assets of the company which would then be available for distribution among the participators.
If two or more persons together satisfy any of the above tests, then they are treated as having control of the company.
Rights that the person is entitled, or will be entitled, to acquire at a future date are taken into account. Certain rights and powers may also be attributed to a person in determining whether they have control, including those of companies that the person (alone or with an associate) control and those of their associates.
Freya has two personal companies, F Ltd and G Ltd. She is the sole shareholder in each. Both companies are under her control and consequently are associated with each other.
Although the National Insurance rates and thresholds for 2022/23 had already been set, at the time of the Spring Statement in March 2022, the Chancellor announced increases in the primary threshold which would align the starting point for National Insurance with the personal allowance from 6 July 2022. However, as the increase does not take effect until part way through the 2022/23 tax year, the two not fully aligned until 2023/24. The lower profit limit for Class 4 contributions was also increased.
Employees pay primary Class 1 National Insurance contributions on their earnings to the extent that these exceed the primary threshold. For 2022/23, contributions are payable at the main rate of 13.25% on earnings between the primary threshold and the upper earnings limit, and at the additional rate of 3.25% on earnings in excess of the upper earnings limit. Employees are treated as having paid contributions at a notional zero rate on earnings between the lower earnings limit and the primary threshold. This has the effect of ensuring that the year is a qualifying year for state pension purpose if the employee has earnings at least equal to 52 times the weekly lower earnings limit.
The lower earnings limit is £123 per week (£533 per month; £6,396 per year) and the upper earnings limit is set at £967 per week (£4,189 per month; £50,270 per year) for 2022/23.
The primary threshold was initially set at £190 per week (£823 per month; £9,880 per year). These thresholds now only apply from 6 April 2022 to 5 July 2022. From 6 July 2022, the primary threshold is aligned with the personal allowance, and from 6 July 2022 to 5 April 2023 is set at £242 per week (£1,048 per month; £12,570 per year). As the increase takes effect three months after the start of the 2022/23 tax year, the annual primary threshold for 2022/23 is £11,908. This will be of relevance to directors with an annual earnings period. The increase in the thresholds does not affect any liability for primary contributions for any tax week commencing before 6 July 2022.
As a result of the increase in the primary threshold, employees will pay less National Insurance from July onwards. There is no change to the secondary thresholds.
Imogen is paid £2,000 per month.
For April to June 2022 inclusive, she pays primary contributions of £155.95 per month (13.25% (£2,000 – £823)).
However, from July 2022, her monthly primary contributions fall to £126.14 (13.25% (£2,000 – £1,048)).
The increase in the primary threshold means that from July she is £29.81 better off each month.
The employment allowance reduces the secondary contributions payable by the employer. The allowance is set at £5,000 for 2022/23, having been increased by £1,000 following the Spring Statement. Eligible employers should remember to claim the allowance.
The starting point for Class 4 contributions is aligned with the primary threshold for Class 1 purposes. To keep the alignment in light of the increase to the primary threshold from July 2022, the lower profits limit for 2022/23 has been increased from £9,880 to £11,908. The increase applies from 6 April 2022.
Under Making Tax Digital (MTD) for VAT, VAT-registered traders must keep electronic records and file their VAT returns electronically using software that is compatible with MTD for VAT. Prior to 1 April 2022, MTD for VAT was only mandatory for VAT-registered traders whose turnover for VAT purposes was above the VAT registration threshold of £85,000. VAT-registered traders whose turnover was below the VAT registration threshold could choose whether to join or not.
Extension to all VAT-registered traders
MTD for VAT is extended from 1 April 2022 to all registered traders. VAT-registered traders whose turnover is below the VAT registration threshold of £85,000 and who have not already joined MTD for VAT must do so from the start of their first VAT accounting period beginning on or after 1 April 2022.
John is a VAT-registered trader with turnover for VAT purposes of £50,000. His VAT quarters run to 31 January, 30 April, 31 July and 31 October. He has not yet joined MTD for VAT.
John must start complying with MTD for VAT from 1 May 2022. This is the first day of the VAT quarter to 31 July 2022 and the first day of his first VAT accounting period that begins on or after 1 April 2022.
He must file the return for the period by 7 September 2022 using MTD-compatible software.
Need to register
Traders who are joining MTD for VAT from 1 April 2022 will need to sign up. They can do this via their Government Gateway Account. Alternatively, if they want to use an agent to submit their returns on their behalf, their agent can sign them up, but will need authorisation from the trader to do so.
Traders who pay by direct debit should avoid signing up too close to the return deadline as they may end up paying their VAT twice. The window to avoid is the period from seven days before the return is due until five days after the return is due.
Under MTD for VAT, the trader must keep their VAT records electronically. This can be done via a software package. Alternatively, spreadsheets can be used. However, where spreadsheets are used, these must be linked to the return – figures should not be entered manually.
VAT returns must be filed using software that is compatible for MTD for VAT. HMRC publish details of software packages that can be used (see www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-vat). However, it should be noted that HMRC do not recommend particular products. Traders should find a product that they are happy with in advance of the deadline
Traders whose turnover is under the VAT registration threshold may wish to review whether, in light of the need to comply with MTD for VAT, it remains beneficial to be VAT-registered.
Corporation tax is being reformed and companies with profits of more than £50,000 will pay corporation tax at a higher rate than they do now. While the changes do not come into effect for a year, applying from the financial year 2023 which starts on 1 April 2023, their impact will be felt sooner where accounting periods span 1 April 2023. Consequently, they will be relevant to accounting periods of 12 months starting after 1 April 2022.
Nature of the changes
From 1 April 2023, the rate of corporation tax that you pay will depend on the level of your profits and the number of associated companies that you have if any.
If your profits are below the lower limit, from 1 April 2023, you will pay corporation tax at the small profits rate. At 19%, this is the same as the current rate of corporation tax.
If your profits are above the lower limit, you will pay corporation tax at the main rate. This has been set at 25% for the financial year 2023.
If your profits fall between the lower limit and the upper limit, you will pay corporation tax at the main rate, but you will receive marginal relief which will reduce the amount that you pay. Marginal relief is calculated in accordance with the following formula:
F x (U-A) x N/A
- F is the marginal relief fraction (set at 3/200 for the financial year 2023);
- U is the upper limit;
- A is the amount of augmented profits (profits plus dividends from non-group companies); and
- N is the amount of total taxable profits.
Where a company benefits from marginal relief, the effective rate of corporation tax will be between 19% and 25%. A company with profits nearer the lower limit will receive more marginal relief than a company with profits nearer the upper limit and pay tax at a lower rate.
The lower limit is £50,000 and the upper limit is £250,000 for a company with no associated companies. Where a company has one or more associated companies, the limits are divided by the number of associated companies plus 1, so that, for example, the lower limit for a company with one associated company will be £25,000 and the upper limit will be £125,000.
The limits are time apportioned where the accounting period (or pro rata period) is less than 12 months.
Where the accounting period spans 1 April 2023 the profits for the period are apportioned and those relating to the period prior to 1 April 2023 will be taxed at the financial year 2022 corporation tax rate of 19%, while those relating to the period from 1 April 2023 to the end of the accounting period are taxed at the relevant rate for the financial year 2023 depending on the company’s profits.
Where the company will from April 2023 pay corporation tax at a rate above 19%, now is the time to plan ahead and, where possible, accelerate profits so that they fall in the current accounting period rather than one spanning 1 April 2023. On the other side of the coin, delaying costs so that they fall in a period spanning 1 April 2023 rather than the current period will also reduce the tax that is payable at a rate above 19%.
ABC limit prepares accounts to 30 September each year. It has annual profits of £300,000.
Its profits for the year to 30 September 2022 will be taxed at 19%.
However, its profits for the year to 30 September 2023 will be time apportioned and six months’ worth will be taxed at 19% and the remaining six months’ worth at 25% — an effective rate of 22%.
The company accelerates a profitable contract so that it is completed before 30 September 2023 so that the profit is taxed at 19%.
To help meet the costs of health and adult social care, a new levy, the Health and Social Care Levy, is introduced from 6 April 2023. Payment of the levy, which is set at the rate of 1.25% of qualifying earnings, is linked to the payment of National Insurance contributions.
Prior to the introduction of the levy and in order to start raising ring-fenced funds for health and adult social care from 6 April 2022 onwards, the rates of ‘qualifying’ National Insurance contributions are to increase by 1.25% for 2022/23 only. Qualifying National Insurance contributions are Class 1, Class 1A, Class 1B and Class 4. Thus, employees, employers and the self-employed will be hit by the rises for 2022/23, and by the levy from 6 April 2023.
The National Insurance rates are due to revert to their 2021/22 levels from 6 April 2023 when the Health and Social Care Levy comes into effect.
Impact on employees
For 2022/23, employees will pay primary National Insurance contributions at the main rate of 13.25% on earnings between the primary threshold (set at £190 per week for 2022/23) and the upper earnings limit (set at £967 per week for 2022/23), and at the additional rate of 3.25% on earnings in excess of the upper earnings limit.
For 2021/22, the main rate is 12% (payable on earnings between £184 per week and £967 per week) and the additional rate is 2% (payable on earnings in excess of £967 per week).
The following case studies demonstrate the impact of the rate rises, which will depend to the extent to which they are offset by the increase in the primary threshold.
Case study 1
Karen is paid £185 per week. For 2021/22, she pays primary contributions of 12p per week. However, for 2022/23, she will not pay any contributions (but will be treated for state pension purposes as having made notional contributions) as her earnings are below the primary threshold of £190 per week.
She is unaffected by the rate rises, and benefits from the increase in the primary threshold.
Case study 2
Clive is paid a salary of £24,000, paid monthly at the rate of £2,000 per month. His pay remains the same in 2022/23 as in 2021/22.
The monthly primary threshold is £833 for 2022/23 and the monthly upper earnings limit is £4,189. For 2021/22, the monthly primary threshold is £797 and the monthly upper earnings limit is £4,189.
For 2021/22, Clive pays primary National Insurance contributions of £144.36 (12% (£2,000 – £797)).
For 2022/23, Clive pays primary National Insurance contributions of £154.63 ((13.25% (£2,000 – £833).
The combined impact of the rate rise and the increase in the primary threshold will mean that Clive will pay an additional £10.27 each month in National Insurance contributions.
Case study 3
Rebecca is a company director with a salary of £150,000 a year.
The annual primary threshold is £9,880 for 2022/23 and £9,568 for 2021/22. The annual upper earnings limit is £50,270 for both years.
For 2021/22, Rebecca pays primary Class 1 National Insurance of £6,878.84 ((12% (£50,270 – £9,568)) + 2% (£150,000 – £50,270))).
For 2022/23, Rebecca pays primary Class 1 National Insurance of £8,592.91 ((13.25% (£50,270 – £9,880)) + (3.25% (£150,000 – £50,270))).
As a result of the rate increases, Rebecca will pay £1,713.07 more in National Insurance contributions in 2022/23 than in 2021/22.
All individuals are entitled to an annual exempt amount for capital gains tax purposes. Net gains (chargeable gains less allowable losses) for the tax year are free of capital gain tax to the extent that they are covered by the annual exempt amount. For 2021/22, the annual exempt amount is set at £12,300.
Use it or lose it
As with the personal allowance for income tax purposes, the capital gains tax annual exempt amount is lost if it is not fully used in the tax year – it is not possible to carry forward any unused part of the 2021/22 annual exempt amount to 2022/23.
As the end of the tax year approaches, now is the time to review gains and losses in the tax year, and planned disposals, to assess whether it is beneficial to make further disposals in 2021/22.
Losses realised in a tax year must be set against any gains for the same tax year to arrive at net chargeable gains, before applying the annual exempt amount. You cannot preserve the losses by using the exempt amount against the chargeable gains. However, there is no need to use losses brought forward from earlier tax years before utilising the annual exempt amount.
For example, if in a tax year you realise a gain of £14,000 and a loss of £6,000, the net gains for the year are £8,000. These are sheltered entirely by the annual exempt amount of £12,300. It is not possible to set the annual exempt amount against the chargeable gain to reduce it to £1,700, then use only £1,700 of the loss, carrying the remaining £4,300 forward.
Married couples and civil partners
Married couples and civil partners can take advantage of the rule that allows them to transfer assets between them at a value that gives rise to neither a gain nor a loss (i.e. the transferor’s base cost). This effectively allows them to shift some or all of a gain from one spouse or civil partner to the other. This is useful to ensure both partner’s annual exempt amounts are utilised.
Case study 1
Mark is planning to sell some shares in Spring 2022 and expects to realise a gain of £10,000. He has not made any disposals so far in 2021/22.
If he sell his shares prior to 6 April 2022, the disposal will fall in the 2021/22 tax year. As his annual exempt amount has not been used, this is available to shelter the gain. Making the disposal prior to 6 April 2022 leaves his annual exempt amount for 2022/23 available to set against any disposal in the 2022/23 tax year.
Case study 2
Duncan and Anthony are civil partners. Antony sold a painting in May 2021 realising a gain of £15,000. This utilised his annual exempt amount in full. He plans to sell another painting and expects to realise a gain of £10,000.
If Anthony sells the painting in 2021/22, he will pay capital gains tax on the gain. However, if he transfers the painting to Duncan prior to sale and Duncan sells the painting, the gain will be Duncan’s rather than Anthony’s and will be sheltered by his annual exempt amount, saving the couple capital gains tax.