Corporation Tax
The main rate of corporation tax for companies with profits in excess of £250,000 is:
For many business owners, your personal wealth is inextricably linked to your business. Whilst the focus of this guide is on personal tax planning, we highlight key corporate tax considerations that may have an impact on your personal tax position.
A Small Profits Rate of 19% applies for companies with profits under £50,000.
The main rate and small profits rate thresholds are reduced pro-rata where there are ‘associated’ companies i.e. if there are two associated companies, the main rate and small profits rate would apply to profits of £125,000 and £25,000 respectively.
Profits falling between the two rates are taxed at 26.5% (there is an alternative calculation which involves a marginal relief fraction of 3/200).
From 1 April 2023, the concept of ‘associated companies’ has been reintroduced in order to determine the rate of Corporation Tax applicable.
A company is associated with another company at a particular time if, at that time or at any other time within the preceding 12 months:
one company has control of the other.
both companies are under the control of the same person or group of persons.
There are a number of factors to consider when reviewing the most appropriate and efficient method to extract profits from your limited company.
Corporation Tax rates.
Personal tax rates.
Utilisation of spouse’s personal allowances.
Dividend Allowance.
Overall levels of personal and household income.
Personal pension contributions.
Employment Allowance.
Involvement in Research and Development Activity.
Exit strategy.
For the employee it is a tax-free benefit (but care is needed not to exceed the Annual Allowance or Lifetime Allowance). For the employer, the contribution will usually be fully tax deductible for Corporation Tax purpose in the year that the contribution is paid.
FICs have increased in popularity over the last few years. Often they go by other names, but the principle is the same.
The basic structure of a FIC involves providing shares to family members. The FIC is then free to trade, make investments (e.g. rental property, investment portfolios) and generate profits from this.
Control can be maintained by the principal business owner(s) through the ability to separate out the rights and powers between the different share classes.
Profits are taxed at Corporation Tax rates and can be reinvested by the FIC without incurring additional tax charges.
Dividend income is not taxable in the hands of the company.
Flexibility when extracting value; and
Capital is typically passed onto younger generations without incurring an Inheritance Tax charge.
Capital Allowances are available to companies (and to unincorporated businesses including furnished holiday letting businesses) for capital expenditure.
Full expensing allows businesses to deduct a 100% first year allowance from their taxable profits for the full cost of qualifying plant and machinery acquisitions (main rate assets).
In addition, a 50% first year allowance deduction applies special rate assets, including long life assets.
SBA may be claimed on qualifying expenditure incurred.
To be able to claim SBA, it is necessary for the structure to be used for a qualifying activity, which includes:
any trades, professions and vocations.
a UK or overseas property business (except for residential and furnished holiday lettings).
managing the investments of a company.
mining, quarrying, fishing and other land- based trades such as running railways and toll roads.
The costs included within the SBA claim would be the acquisition costs of a structure or the construction costs of building the structure. The cost of the land should not be included within the claim.
The rate for the SBA is 3%. It is not possible to claim AIA on expenditure that qualifies for the SBA.
Tax Tip | Plan your expenditureThe timing of capital expenditure is important to ensure that you maximise the available allowances.
Taking advantage of these reliefs can create funds which you can reinvest in your business. If you are a loss making business, in some cases you can surrender losses for a cash tax credit.
A company may be able to claim a number of enhanced tax reliefs on a range of expenditure, which H M Revenue and Customs are trying to encourage.
Research and Development (R&D) tax relief is an incentive available to UK limited companies which encourages investment and innovation. The relief can reduce a company’s tax liability or, if a company is not in profit, provide a payable cash refund. Research and Development tax relief for Small and Medium Enterprises (SMEs) currently provides an additional allowance of 86% of a company’s qualifying R&D expenditure. The rate of tax credit for refunds for SMEs is 10%.
For large companies and other companies unable to utilise the SME scheme, a tax credit of 20% is given for a company’s qualifying R&D Expenditure Claim (RDEC), with tax refund claims restricted by 25%.
The costs qualifying for R&D relief have been changed to remove certain costs (such a overseas subcontractors) and introduce new costs (such as datasets and of cloud computing).
There is also now a whole raft of additional compliance measures which impact when claims can be made and how they must be notified. Non-compliance can result in an initial rejection of claims or, in a worst-case scenario, complete failure of a claim altogether.
The SME and RDEC schemes have been merged for accounting periods beginning on or after 1 April 2024. As for the RDEC scheme, a tax credit of 20% is given for a company’s qualifying RDEC, with tax refund claims restricted by 25%.
Enhanced R&D intensive support (ERIS) has been introduced to allow loss-making R&D intensive SMEs to:
deduct an extra 86% of their qualifying costs in calculating their adjusted trading loss, as well as the 100% deduction which already appears in the accounts (or in the computations as a result of s1308 CTA 2009), to make a total of 186% deduction
claim a payable tax credit, which is not liable to tax and is worth up to 14.5% of the surrenderable loss
A company meets the intensity condition if:
it is claiming for an accounting period beginning on or after 1 April 2024
its relevant R&D expenditure is at least 30% of its total expenditure (including that of any connected companies)
Other conditions apply.
Land Remediation Relief provides an additional tax deduction of 50% for qualifying expenditure incurred by companies in cleaning up land acquired from a third party, in a contaminated state.
Land Remediation Relief is available for both capital and revenue expenditure. However, the company must elect, within two years of the end of the accounting period in which the expenditure is incurred, to treat qualifying capital expenditure as a deduction in computing taxable profits.
A company that makes a loss can surrender that part of the loss that is attributable to Land Remediation Relief in return for a cash payment (a tax credit) from the Government.
Qualifying expenditure includes the cost of establishing the level of contamination, removing the contamination or containing it so that the possibility of relevant harm is removed. There is, however, no relief if the remediation work is not carried out.
The patent box provisions can be used to reduce tax for activities that result in a patented innovation. Effectively, a 10% tax rate can be applied to all profits attributable to products, processes or royalties that carry on or include a qualifying patent.
There is a raft of tax reliefs available specifically for the creative sector, which includes: films, animation, high end TV programmes, video games, theatres, orchestras, museums and gallery exhibitions. Qualifying conditions vary and you should therefore review in the context of your company’s activities.
