Understanding Current Corporation Tax Rates and Marginal Relief in the UK
Introduction
Corporation tax is a key part of running a business in the UK. It is important to know the current corporation tax rates and understand how marginal relief works. This can help you plan for your business expenses and ensure you are not paying more tax than needed. In this guide, we will explain the corporation tax rates and how marginal relief applies to businesses with different levels of profit.
1. Current Corporation Tax Rates (as of 2024)
In the UK, corporation tax rates depend on how much profit your company makes. Here are the main rates for 2024:
Small Profits Rate: If your company makes up to £50,000 in profits, you will pay 19% in corporation tax.
Main Rate: If your company makes more than £250,000 in profits, you will pay 25%.
Marginal Rate: If your profits are between £50,001 and £250,000, you can get marginal relief, which means you pay a rate between 19% and 25%.
| Taxable Profits (£) | Corporation Tax Rate | Marginal Relief Applicable | Effective Tax Rate |
|---|---|---|---|
| 0 – 50,000 | 19% (Small Profits Rate) | No | 19% |
| 50,001 – 250,000 | 25% (Main Rate) | Yes | Between 19% and 25% |
| Above 250,000 | 25% (Main Rate) | No | 25% |
2. What is Marginal Relief?
Marginal relief is a way to ensure that companies with profits between £50,001 and £250,000 do not face a sudden jump from 19% to 25% in tax rate. It helps smooth out the tax rate so companies only pay slightly more tax as their profits grow.
3. How to Calculate Marginal Relief
If your company’s profits are between £50,001 and £250,000, you can use marginal relief to lower your tax bill. Here is how you calculate it:
Use the formula:
Marginal Relief = (3/200) × (Upper Limit - Taxable Profits)
In this case, the upper limit is £250,000.
Example Calculation
Imagine your company made £100,000 in profits:
Calculate Marginal Relief:
(3/200) × (£250,000 - £100,000) = (3/200) × 150,000 = £2,250
Determine Tax Liability:
Without Relief: 25% of £100,000 = £25,000
With Relief: £25,000 - £2,250 = £22,750
Effective Tax Rate:
(£22,750 / £100,000) × 100 = 22.75%
This means that instead of paying 25%, your effective tax rate would be 22.75%.
4. Associated Companies and Marginal Relief
If your company has associated companies, it affects how marginal relief is calculated. Associated companies are companies that are linked through ownership. For example, if one person owns more than one company, they are considered associated.
The profit limits for marginal relief are split among all associated companies.
Example:
If your company has one associated company, the lower limit becomes £25,000 (£50,000 / 2), and the upper limit becomes £125,000 (£250,000 / 2). This affects how much marginal relief you can claim.
5. How to File for Marginal Relief
To claim marginal relief, you need to include it in your corporation tax return. Here are the steps:
Step 1: Calculate your taxable profits.
Step 2: Use the marginal relief formula to calculate the relief.
Step 3: Include this amount in your corporation tax return when you file it.
Make sure you keep all records and calculations, as HMRC may need to check them. If you need help, MA & CO Accountants can assist you with filing and calculations.
6. Recent Changes to Corporation Tax Rates
In April 2023, the corporation tax main rate was increased to 25% for profits over £250,000. At the same time, marginal relief was reintroduced for businesses with profits between £50,001 and £250,000. This means businesses in the middle profit range can still benefit from lower tax rates.
7. Impact of Marginal Relief on Businesses
Smooth Transition: Marginal relief helps companies transition from the small profits rate to the main rate smoothly.
Tax Savings: Companies with profits in the marginal band (between £50,001 and £250,000) can reduce their tax payments.
Planning for Growth: Marginal relief is useful for companies that are growing, as it helps manage cash flow and reduce tax costs as profits increase.
8. Common Mistakes to Avoid
Forgetting Associated Companies: Not considering associated companies can lead to incorrect calculations.
Incorrect Calculations: Always use the correct formula for marginal relief to ensure you are not overpaying or underpaying tax.
Missing Deadlines: Make sure you file your corporation tax return on time to claim marginal relief.
9. Expert Tips for Maximizing Marginal Relief
Track Associated Companies: Keep a clear record of any associated companies and adjust your marginal relief calculation accordingly.
Consult a Professional: Tax calculations can be complex. If you are unsure, consult a tax advisor. MA & CO Accountants can help you with your tax planning and filing.
Plan Your Profits: If your profits are near the lower or upper limit, plan accordingly to take full advantage of marginal relief.
Conclusion
Corporation tax rates and marginal relief can make a big difference to your business’s finances. By understanding how these rates work and how to calculate marginal relief, you can save money and plan better for the future. Remember that associated companies can affect your eligibility, so always check your situation carefully.
If you need help with your corporation tax return or understanding marginal relief, reach out to MA & CO Accountants. Our team can make sure you get it right and save as much as possible on your taxes.
FAQs
1. What is the current main rate of corporation tax in the UK?
The current main rate is 25% for profits over £250,000.
2. How does marginal relief benefit companies?
Marginal relief helps companies with profits between £50,001 and £250,000 by gradually increasing the tax rate, instead of jumping from 19% to 25%.
3. What are associated companies?
Associated companies are companies linked by ownership. If you have associated companies, it affects the limits for marginal relief.
4. How can I file for marginal relief?
You can file for marginal relief through your corporation tax return. Calculate your relief and include it in your return.
5. Have there been any recent changes to corporation tax rates?
Yes, in April 2023, the main rate increased to 25% and marginal relief was reintroduced for profits between £50,001 and £250,000.
For more information on corporation tax and to get personalized advice, visit MA & CO Accountants.
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