UK Budget 2021 - corporation tax

Mar 08, 2021

From April 2023, the rate of corporation tax will increase from 19 percent to 25 percent on profits over £250,000. The rate for small profits under £50,000 will remain at 19 percent. According to the Budget documents, there will be relief for businesses with profits under £250,000 so that they pay less than the main rate.

Companies were expecting corporation tax to be reduced to 17 percent in April 2020 however that reduction was put on hold in last March’s Budget with the rate staying at 19 percent from April 2020. 

The announcement of an increase to 25 percent by April 2023 will mean larger companies will be paying 6 percent more in tax in the space of a few years while smaller companies will not see the promised rate reduction of 17 percent materialise and those falling in between will see their corporation tax bill increase the closer they get to profits of £250,000.

This system of providing a small profits rate of 19 percent with a tapering in the rate payable between this and the main rate of 25 percent bears similarity to the pre-April 2015 corporation tax system, though the threshold at which the main rate of 25 percent will kick in is much lower than the £1,500,000 then in place.

Details of how this will practically operate are now available in an accompanying policy paper which confirms that in line with the approach taken with the former rules, the small profits rate will not apply to close investment-holding companies. The definition of a close investment-holding company will follow the definition previously found at Section 34 CTA 2010.

Marginal relief provisions will also be introduced so that, where a company’s profits fall between the lower and upper limits, it will be able to claim an amount of marginal relief that bridges the gap between the lower and upper limits providing a gradual increase in the rate of corporation tax.

The £50,000 lower and £250,000 upper limits will be proportionately reduced for short accounting periods and where there are associated companies.

The related 51% group company test currently relevant when determining if corporation tax instalments are required will be repealed and replaced by associated company rules. This will be the case for its application for determining whether a company is large or very large for quarterly instalment payment purposes or for determining whether a company may elect to use the small claims treatment for the Patent Box.