UK Corporation Tax Increase: How Your Business Can Mitigate the Rise

Corporation tax is a levy applied to company profits. The UK government has changed it numerous times over recent years, with the percentage now standing between 19% and 25% depending on the size of your business. 

The most recent change was in April 2023, with some larger companies now falling into this higher tax bracket. 

Below, we have looked at the size of companies that are liable to pay this increased corporation tax and some useful tactics for reducing your company’s tax burden.

The Increase in UK Corporation Tax

Here’s a breakdown of the current structure (as of June 2024) to help you navigate the new tax environment: 

●     Small Profits Relief: This measure is a welcome benefit for smaller companies. Businesses with augmented profits under £50,000 continue to enjoy a reduced corporation tax rate of 19%.

●     The Sliding Scale (Marginal Relief): Marginal relief is a buffer zone for companies between £50,000 and £250,000 in profits. This range benefits from a sliding scale of tax rates, offering some relief before reaching the full 25% rate. The measure means the incentive to increase company profitability remains after exceeding the £50,000 threshold.

●     Main Rate: Companies exceeding the £250,000 threshold now face a 25% corporation tax rate on their profits. For example, if profits are £500,000, the corporation tax would be £125,000.

●     Associated Companies: Finally, for businesses with affiliated companies, both the profit thresholds (£50,000 and £250,000) are divided by the total number of active companies worldwide. This ensures a fair application of the tax rates. 

These figures are all based on "augmented profits", a specific term HMRC uses and may differ from your standard profit calculations.

Tax Mitigation Strategies for UK Businesses 

Despite these high rates, UK businesses can implement various tax mitigation strategies to reduce HMRC’s tax take. Here are a few we would recommend to any businesses looking to reduce their tax burden:

Maximise Allowable Expenses 

The first and most obvious tactic is to search for allowable expenses that can be deducted from taxable profits. Companies sometimes underestimate their costs or miss out on specific qualifying items, leading them to pay more than they should. Here are some common examples of allowable expenses for UK businesses: 

- Office expenses, such as stationery or telephone bills

- Travel expenses, including fuel, parking fees, train, or bus tickets

- Clothing expenses, like uniforms

- Employee-related costs, such as wages or subcontractor fees

- Purchases for resale, including inventory or raw materials

- Financial expenses, such as insurance premiums or bank fees

- Business premises costs, like heating, lighting, or business rates

- Advertising or marketing expenses, such as website costs

- Training courses relevant to your business, including refresher courses

Capital Allowances 

Capital allowances are another tax relief available to businesses when spending on structures and buildings as well as equipment and machinery. Instead of claiming the full expense in year one, companies can spread deductions over multiple subsequent accounting periods. 

There have been some extra incentives for UK businesses looking to invest in capital allowances in recent years, such as ‘Complete Full Expensing’ announced in the 2023 Spring Budget; which means that companies can deduct 100% of their costs of new plant and machinery (P&M) items qualifying for the main pool. 

Pension Contributions 

Corporation tax relief on employer pension contributions may also apply. When firms add to employees’ registered pension schemes, they can count contributions as deductible business expenses. 

Increasing outlays reduces taxable profits, lessening levies on the remainder. This is particularly relevant for sole proprietorship businesses where directors can pay into their own personal pension pot and in doing so reduce their annual tax bill. 

Research and Development (R&D) Tax Credits 

Claiming tax relief for qualifying R&D activities can help reduce mitigate tax, too. Businesses can deduct the initial expense plus an extra percentage from taxable profits (as if they had spent extra money). 

To qualify for R&D tax credit, the project may involve researching or developing a new process, product, or service, or enhancing an existing one. You must be able to demonstrate how your company project: 

• Sought an advancement in the field
• Faced scientific or technological uncertainties
• Made efforts to resolve these uncertainties
• Could not have been easily solved by a professional in the field 

Not Sure Where to Start? Seek Professional Accounting Advice 

If you’re unsure about how much corporation tax you owe or how to improve your business’s tax efficiency, we can help. 

Linggard and Thomas are expert accountants that can help you understand your corporation tax obligations and uncover opportunities for tax relief. 

As tax specialists, our team is up-to-date with all the latest UK tax legislation, meaning we can give expert financial advice based on current best practice to your team. 

Get in touch today to see how we can empower your business to grow with smarter business finances.

‍