Is your company paying Corporation Tax at the right rate?
The rate of Corporation Tax you pay depends mainly on your taxable profits. However, the calculation is not always as simple as it first appears.
The two main rates
The main rate of Corporation Tax is 25%. This applies where profits exceed £250,000. Meanwhile, companies with profits of £50,000 or less usually pay the small profits rate of 19%.
However, these thresholds are not fixed for every company. Importantly, both will reduce if your company has associated companies.
Profits between the thresholds
The position becomes more complicated in the middle. Where profits fall between £50,000 and £250,000, tax is charged at the 25% main rate. Marginal relief then reduces the overall amount payable.
Accordingly, the effective rate rises gradually as profits increase. It does not jump straight from 19% to 25%. Therefore, a company with profits just above £50,000 will not suddenly pay 25% on everything.
Conversely, a company with profits close to £250,000 pays tax at almost the full 25% rate. In this way, marginal relief creates a smoother transition between the two rates.
How marginal relief works
The mechanics are straightforward in principle. First, calculate Corporation Tax at the main rate of 25%. Then, deduct marginal relief to arrive at your final liability. The relief uses a standard fraction of 3/200.
You can use HMRC’s marginal relief calculator to check your figures: https://www.gov.uk/marginal-relief-calculator.
What to check before you file
So, is your company paying Corporation Tax at the right rate this year? Review the following points carefully:
- your total taxable profits for the accounting period
- whether those profits sit close to either threshold
- the number of associated companies you have
- whether the thresholds have been reduced as a result
Consequently, you should not assume that your profit figure alone determines the rate. Associated companies can change the outcome significantly. As a result, errors here are common and can prove costly.
Contact us
Is your company paying Corporation Tax at the right rate? Get in touch and we will check your thresholds, associated companies and marginal relief.
