According to the recent Budget announcement, corporation tax is set to rise in the coming years. Here’s everything you need to know about the changes and how they might impact you.
Please note that tax treatment depends on the specific circumstances of the individual and may be subject to change in the future.
What is corporation tax?
This is a type of tax aimed specifically at businesses. If a company does well and makes money, a percentage of the profits are taxed and paid to the government.
The current rate of corporation tax in the UK is 19%. It’s important to remember that this tax only applies to profitable companies. A common misconception is that it is a tax every business pays, but you only pay it if you are making a profit after covering all of your costs.
How much is the rate increase?
The corporation tax rate is going to rise from 19% to 25%.
Although there’s plenty of time before this transition takes place, it’s important for businesses to prepare for these changes.
One positive piece of news is that the small profits rate (SPR) will remain in place. This means that any business with profits of less than £50,000 will be exempt from the rate increase. So if you have a small business that makes less than £50,000 in profit, you’ll pay the same 19% rate that you pay today.
When will the corporation tax rate change?
In the announcement, Chancellor Rishi Sunak explained that there will be no immediate changes made to the tax.
The proposed increase in the rate of tax will come into effect on 1 April 2023. This means that until then, the tax will remain at its current level of 19%.
Is this a good thing?
Any changes in taxation are likely to have benefits and drawbacks.
As Paul Fazackerley, IFA at Furnley House explains. “While not everyone will support raising the rate of corporation tax, the reality is that it’s the right thing to do.
“Corporation tax is a tax on profits, not turnover, so it is only a tax on businesses that are thriving. Businesses have had a lot of support over the last year and there have been more winners than perhaps some people realise.
“The worst thing we could have had was more changes to pensions or savings legislation, particularly with so many people having to adjust their retirement plans due to the pandemic. So a tax that puts more burden on successful businesses without impacting ordinary savers or retirees makes a lot of sense.”
How does this rate compare to other countries?
Even once corporation tax goes up, the UK will still be very competitive in comparison to other countries.
Here are the corporation tax rates of some other countries around the world:
- Brazil 34%
- Germany 30%
- Japan 30.62%
- Australia 30%
- New Zealand 28%
- The United States 27%
- Canada 26.5%
How will these corporation tax changes affect me?
The impact of the proposed increases in 2023 will depend on your situation.
For business owners:
- The amount of tax you pay may increase if you have a profitable business.
- If your business is struggling, perhaps due to the effects of the coronavirus pandemic, you might pay no corporation tax if you’re not profitable. Or you may be eligible for the lower SPR if you net less than £50,000 in profit.
If you’re not a business owner, you may not be directly affected by these changes. However, there may be an indirect impact on your day-to-day life:
- Businesses might choose to pass this increase in costs on to customers. So the prices of some good and services might go up, which may lead to inflation.
- If you work for a company that these changes impact, it could potentially affect your job or pay. Businesses might look to reduce costs in other areas to offset the higher tax bill.