UK Corporation Tax: What It Is And What’s In Store

UK Corporation Tax

The UK corporation tax hike

On March 3, 2021, British Finance Minister Rishi Sunak announced an increase in the UK corporation tax rate from 19% to 25% from April 1, 2023. The corporate tax rate hike will help the government regain a sound financial position as it spends massively on support measures for businesses through the COVID-19 pandemic.

Sunak said, however, that around 70% of UK companies would be unaffected by the corporate tax rate hike as entities with profits of £50,000 and less will still be taxed at 19%, the current rate. Only companies with profits above £250,000 will have to pay taxes at the full 25% rate. As for companies with profits between £50,000 and £250,000, their tax rate will be slightly lesser than 25% — with a gradual rise in the effective tax rate corresponding to the level of profit.

What is the UK corporation tax?

Corporation tax is levied on profits made by UK-based companies and by entities registered overseas with permanent establishments in the UK. These companies or entities include public corporations and unincorporated associations such as industrial and provident societies, clubs, and trade associations.

Corporation tax is charged on the profit that a company makes in an accounting period or a period for which it draws up its accounts. The tax rate is set for a financial year that runs from April to March.

Taxable profits for corporation taxes comprise –

  • Profits from taxable income. Example: Trading profits or investment profits (except dividend income which is taxed differently)
  • Capital gains which are also known as ‘chargeable gains’ for corporation tax purposes

There are also other allowances, deductions, and reliefs that can be applied while calculating a company’s taxable profits. Another key aspect is group relief, wherein an entity belonging to a group of companies can give up its trading losses by balancing them against the profits of another entity in the group.

Key Features of the UK Corporation Tax

Profits and Deductions

The starting point for the calculation of a company’s taxable profit is the profit or loss per the company’s accounts.

All costs incurred by the company which is included in the P&L account will be allowable for corporation tax purposes and all income will be taxable unless there is a specific rule to the contrary.

Company Groups

Groups typically consist of a parent company and several subsidiary companies. For two companies to be considered members of the same group for tax purposes, one company must have at least 75% ownership of the other, or they must both be owned (at least 75%) by a third company.

Tax Rates

There has been a unified corporation tax rate in place since 1 April 2015, instead of separate main and small profits rates (rates do not differ based on profit levels). This will change now since a tax rate hike is on the cards from April 2023.

However, a different tax rate has applied to companies with income and gains from oil and gas, and oil and gas extraction or oil rights. These profits are known as ring-fence profits. A special tax rate is also applicable to unit trusts and open-ended investment companies.

We help companies with the iXBRL tagging for their CT600 filings with the HMRC. Contact us for help with your corporation tax filings.