How do you calculate Corporation Tax? What is the Small Profits Rate? How do you calculate Marginal Tax relief? How do you adjust for Associated Companies? What is meant by Control? What are Augmented profits?

This is a freeview guide to Corporation Tax calculation for small, uncomplicated companies that have an accounting period that either straddles or commences on or after 1 April 2023.

Subscribers see your detailed version of this guide.

At a glance

From 1 April 2023, there are two Rates of Corporation Tax (three if you include the effective Marginal rate).

As a result, most companies now have to follow a set of steps in order to calculate their profits for Corporation Tax and complete their company tax return.

Key measures FY2024
1/4/2024 - 31/3/2025
FY2023
1/4/2023 - 31/3/2024
FY2022
1/4/2022 - 31/3/2023
Main rate 25% 25% 19%
Small profits rate 19% 19% -
Lower & Upper Limits -
Marginal relief ✔ 

-

Control Tests  ✔  -
Associated Companies  ✔  -
Adjustment for each FY  ✔  -
  • A UK company pays Corporation Tax on its Taxable Total Profits (TTP).
    • TTP are broadly, accounting profits, as adjusted for tax, all other profits and income, plus capital gains less losses or reliefs claimed.
  • A company prepares accounts for an accounting period which normally covers a year.
    • A company's year-end is set according to its date of incorporation.
    • You can change that date.
    • See A new company? Start here
  • The company tax year, known as a 'Financial Year' (FY), starts on 1 April. 
    • Many small companies change their accounting period to 31 March for convenience.
    • When the company's accounting period straddles 1 April 2023 it divides its TTP into two periods for Corporation Tax (i.e. FY2022 and FY2023) and may well pay tax at different rates in each period as a result.
  • An accounting period may be short or long depending on the date it was formed, the accounting period chosen or the date that it ceases its activities.

The basic Corporation Tax calculation

All trading, business and other profits and income

X
Capital gains  X
Less Losses and Reliefs  X
Taxable Total Profits (TTP) X
Corporation tax at Main Rate (25%) or Small Profits Rate (19%) X
Less Marginal Relief (if applicable, against Main Rate) (X)
Corporation Tax payable X

Payment of tax is due to HMRC within nine months and one day of its accounting period.

The corporation tax return is due within 12 months of the end of the accounting period. 


The Marginal Relief calculation
(FY2023 onwards, if applicable) is as follows:

When adjusted 'Augmented' profits fall between the Lower and Upper limits, Marginal relief is given by reducing the 25% Corporation Tax charge by: 

Fraction x (Upper Limit – Augmented Profits) x Taxable Total Profits/Augmented Profits 

In the legislation it is described as: F x (U-A) x N/A 

where:

  • F = Standard marginal relief fraction (3/200)
  • U = Upper limit 
  • A = Augmented profits
  • N = Taxable Total Profits

Basic example

For a company with a 31 March 2024 year-end, profits of £100,000, no associated companies and no exempt distributions, the Corporation Tax calculation, including marginal relief, is as follows:

  £
Corporation Tax at the main rate: £100,000 x 25%  25,000
Less marginal relief: 3/200 x (250,000 – 100,000) x 100,000/100,000  (2,250) 
Corporation Tax due 22,750 

 What rate of tax is paid?

The tax rate paid depends on which period a company's profits fall.

FY2017-FY2022:

  • There was a single 19% rate of tax.

FY 1 April 2023 onwards:

  • The main rate of Corporation Tax increased from 19% to 25%.
    • The small profits rate (19%) applies to single companies with Augmented profits of less than £50,000.
    • The main rate (25%) applies to single companies with Augmented profits of more than £250,000.
    • The main rate (25%) also applies to single companies with Augmented profits between £50,000 and £250,000, but marginal relief will be given. 
    • The effective marginal rate is 26.5%.
  • The £50,000 threshold is known as the Lower limit
  • The £250,000 threshold is known as the Upper limit.

As there are variable rates of Corporation Tax, the rate payable is determined by a number of different factors:

Activities

  • Whether a company is a Close Company
    • A company is 'close' if it is privately owned and controlled by five or fewer individual participators.
  • Close Investment Holding Companies (CIHCs)
  • There are special rules for oil and gas companies which are outside the scope of this note.

Lack of activities: the following are not counted as Associates

  • Non-trading investment holding 'passive' holding company.
  • Dormant companies.

See Trading status & tax 

Relationships: Does the company have any Associated Companies?

Size: Augmented Profits are the measure to determine whether the company is below the adjusted Lower limit or above the Upper limit for Corporation Tax. The limits determine which rate is payable or whether Marginal Relief is given.

  • Augmented Profits are TTP plus exempt income from dividends or distributions but excluding dividends from 51% group companies.

Accounting periods: different rates of tax will apply if a period falls into FY2022 or FY2023. 

  • The upper and lower limits are reduced where:
    • There is a short accounting period.
    • There are associated companies; by dividing the limits by one plus the number of associated companies, which the company has at any time during its accounting period.
    • See Companies, Trading, Non-trading & Accounting periods

Marginal relief can be calculated using HMRC’s online calculator at ‘Calculate marginal relief for Corporation Tax’.

Useful guides on this topic

Close companies and control
What is a Close company? What are the tax consequences? What is a Participator? What is meant by Control of company? What are the tests for Control? 

Associated company tests 
What is an associated company? What are the tax effects of associated companies? How do the control tests work?

Associated company checklist
A checklist to help determine whether companies are associated for Corporation Tax

Trading status & Tax
Is your company's business a trade, a business or an investment activity? What is the difference? What are the tax issues for the company and its shareholders?

A new company? Start here
'At a glance' freeview guide is essential reading for anyone thinking about starting up a new company. 

An existing company? Start here...
You have started to run your business through your company. What about Corporation Tax compliance? Does your company have special tax rules that apply?

Close company loans toolkit
What is the Corporation Tax treatment when a close company makes a loan to a participator (director-shareholder)? How do the 'bed and breakfasting' rules work?

 


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