Corporation Tax for Small Businesses | Navigating 2023 Changes

Starting and running a small business is no easy feat. Between managing your finances, and providing top-notch services, it’s no surprise that many small business owners are feeling overwhelmed. With the recent changes to corporation tax in 2023, it’s more important than ever to stay on top of your finances. But don’t worry, we’re here to help! In this article, we’ll break down the basics, the new tax rates, and how to reduce your tax bill. So sit back, grab a cup of coffee, and let’s dive into the world of corporation tax for small businesses.

Corporation Tax for Small Businesses | A Guide For Business Owners

You’ve started your own small business, worked hard to grow it and finally, you’re starting to see the fruits of your labour. But with success come responsibilities, and one of those responsibilities is corporation tax.

What is Corporation Tax and How Does it Work?

Corporation Tax is a tax levied on limited companies and other organisations that are considered to be separate legal entities from their owners. This means that the profits earned by the business are taxed as if they were the income of a separate person.

In simple terms, Corporation Tax is a tax on the profits that your business makes each year. The amount you’ll need to pay will depend on how much your company earns.

Are You Subject to Corporation Tax as a Small Business Owner?

If you’re running a limited company, then you are subject to Corporation Tax. However, if you’re running a sole trader or partnership, you’re not subject to Corporation Tax. Instead, you are subject to income tax.

It’s important to understand your tax obligations so that you can budget and plan effectively for the future. If you’re unsure about whether you’re subject to Corporation Tax, it’s best to seek the advice of a professional accountant.

Understanding the Latest Corporation Tax Rates for 2023

The world of finance and taxation is constantly evolving, and corporation tax is no exception. In 2023, the UK government made some significant changes to the rates of corporation tax, which could have an impact on small businesses.

What’s New in Corporation Tax for 2023?

So, what are the new corporation tax rates for 2023? They are based on the amount of profit a company is making:

• £0-£50,000 – remains at 19%
• £250,000+ – new rate of 25% applies
• £50,001-£249,999 – 25% but with “marginal relief” available.

If you company makes profits between £50,000 and £250,000, then you can apply a “marginal relief” to your tax bill. Marginal relief reduces the corporation tax rate on figures between £50,000 & £250,000 so as not to burden these businesses with a full 25%. We will get into the specifics of how this works later in the article.

How Do the 2023 Corporation Tax Rates Apply to Small Businesses?

The new corporation tax rates for 2023 apply to all UK companies, regardless of size. For small businesses, the new rates could mean paying a little more depending on your company’s profit margins. For smaller businesses, the rates will remain the same, but for a company earning over £50,000, you will be liable for higher tax rates.

It’s important for small business owners to understand the new corporation tax rates and how they will impact your business. By understanding the changes, you can take the necessary steps to minimise your tax bill and maximise your profits. With the right planning and preparation, you can ensure that your company is well-positioned to weather any changes and continue to grow and thrive in the years ahead.

Maximising Your Marginal Relief: How to Calculate Your Corporation Tax & Your Marginal Relief

How Does Marginal Relief Work in Corporation Tax?

Marginal relief is a way for small businesses to reduce their Corporation Tax bill by gradually phasing in the rate increase between the lower and upper Corporation Tax rates. The aim of marginal relief is to prevent small businesses from being hit with a sudden and large increase in their Corporation Tax bill.

A Step-by-Step Guide to Calculating Your Corporation Tax with Marginal Relief

Calculating your Corporation Tax bill with marginal relief can be complicated, but it’s important to understand how it works to ensure you are paying the right amount of tax. Here’s a step-by-step guide to help you calculate your Corporation Tax with marginal relief, with an example:

 1 – Determine your company’s taxable profit. For the sake of this article, we will assume you already have this figure!

• • Let’s say it’s £130,000.

2 – Calculate the amount of tax owed at the new rate of 25% to give you your starting point:

• • £130,000 x 25% = £32,500 at new rate.

3 – Work out how much of your £250,000 “threshold” has been unused by taking your step 1 figure and taking it away from the £250,000 limit.

• • £250,000 – £130,00 = £120,000 remaining threshold.

4 – Take your remaining threshold and multiply it by 1.5% (0.015) to give you the marginal relief you have available:

• • £120,000 x 1.5% = £1,800 marginal relief available.

5 – Deduct the amount of marginal relief from the amount of tax owed at the higher rate to determine the final corporation tax bill.

• • £32,500 – £1,800 = £30,700 owed – a total of 23.6% rather than 25%

Strategies for Reducing Your Corporation Tax Bill

Small business owners are always looking for ways to increase profits and reduce expenses. One area that often goes overlooked is corporation tax. With the new corporation tax rates in 2023, it’s more important than ever for small business owners to understand their liability and take steps to minimise it.

What Can You Do to Lower Your Corporation Tax Burden as a Small Business?

Two things: Good planning and a good accountant! That’s a huge part of the battle when trying to reduce your tax liabilities. So much can be achieved through good communication with a top-notch financial assistant. But here are some specific examples of the things you should be looking to do:

1. Claim expenses: Make sure you claim all expenses that are allowable for corporation tax purposes. This includes things like business travel, staff salaries, and office costs.
2. Make use of tax-efficient schemes: There are several tax-efficient schemes available for small businesses, such as the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). There are schemes available, but not all will apply to your business. A good accountant should keep you in the loop as to what is or isn’t available to you.
3. Consider restructuring: If your business is structured in a way that is not tax-efficient, you may want to consider restructuring. This could involve changing the legal structure of your business, or transferring assets to a new company.
4. Be tax-planning savvy: Tax planning is an important part of managing your corporation tax liability. Make sure you understand the tax rules and plan your finances accordingly. Leave plenty of time to converse with your advisors.

Top Tips for Minimising Your Liability

The methods above are all going to help you to reduce your liability. But in general terms, there are some practices and behaviours that are automatically going to help you be prepared for tax season.

1. Keep accurate records: Good record-keeping is essential for accurately calculating your corporation tax liability. Make sure you keep records of all business income and expenses.
2. Plan your finances (or have a professional do it for you): Make sure you have a good understanding of the tax rules and plan use of your finances accordingly. This will help you minimise your corporation tax liability by using your finances in a tax efficient and timely manner. E.g. make your large capital investments made before the end of year accounts.
3. Seek professional advice: If you are unsure about any aspect of corporation tax, seek professional advice from an accountant or tax specialist. They will be able to provide you with tailored advice on how to minimise your corporation tax liability
4. Stay on top of your accounts: Keeping accurate and up-to-date records will help you stay on top of your corporation tax obligations and ensure that you are paying the right amount of tax. Being organized means you can work quickly, and you will have time to look at all of your options.

Corporation Tax Can Be A Minefield – But There Are People On Hand To Help!

If you’re a small business owner, dealing with corporation tax can feel like navigating a minefield. With constantly changing rates and regulations, it can be difficult to know where to turn for help. But don’t worry! Simply by understanding how the new 2023 rates apply to your business and what “marginal relief” is, you will be a good way towards successfully navigating this complicated area of finance. By staying informed, you’ll be able to focus on what’s important – on growing your business and serving your customers.

Navigating the rules and regulations around corporation tax can be a challenge, particularly when it comes to calculating your marginal relief or finding ways to minimise your liability. This is where having a professional bookkeeper or accountant can make a big difference. Not only can they help you understand the latest tax changes and ensure you’re complying with all the requirements, but they can also provide valuable insights and strategies to reduce your tax bill. By outsourcing your finance function to a trusted expert, you can focus on what you do best and leave the tax headaches to them. 

If you’re looking for professional support, consider reaching out to Direct Peak Accountants, an expert accountancy and bookkeeping firm in the UK. Our team of experts will help you manage your corporation tax obligations and take your business to the next level. Contact us today to schedule a consultation.