Pensions Versus Corporation Tax Changes 2023

The main rate for corporation tax is currently 19% and increases to 25% on 1 April 2023.

Therefore, if your company year end is after 31 March 2022 i.e., 1 April 2022 onwards, you are already in your new trading year and the coming year's trading profits may be taxed at higher rates depending upon company profits.

In essence, the new rate and levels are returning to the old tiered and marginal corporation tax rates before they moved to a single main rate on 1 April 2015 at 20%.  The preceding year 2014, rates were:

• Small Profits Rate (profits up to £300,000) – 20%
• Main Rate (companies with profits over £1.5m) – 21% on all profits
• Marginal Rate (profits up to £1.5m), 1^st £300,000 at 20% and next £1.2m at a marginal rate of 21.25% (the standard marginal relief fraction was 1/400^th i.e., 0.25% which is added to main rate 21% = 21.25%)

New (from 01/04/2023)

• Small Profits Rate (profits up to £50,000) – 19%
• Main Rate (companies with profits over £250,000) – 25%
• Marginal Rate (profits up to £250,000), 1^st £50,000 at 19% and next £200,000 at a marginal rate of 26.5% (the standard marginal relief fraction will be 3/200^th i.e., 1.5% which is added to main rate 25% = 26.5%)

Example Corporation Tax Calculations:

Company A Profits 2023 -  £250,000

• £50,000 at Small Profits Rates 19% = £9,500 tax.
• £200,000 at Marginal Rate 26.5% = £53,000 tax.
• Total Corporation Tax Bill = £62,500  (fraction is accurate as £250,000 at main rate 25% = £62,500).
• Compare this to the current rate at 19% = £47,500.

Company B Profits 2023 -  £100,000

• £50,000 at Small Profits Rates 19% = £9,500 tax.
• £50,000 at Marginal Rate 26.5% = £13,250 tax.
• Total Corporation Tax Bill = £22,750  (effective rate of corporation tax 22.75%).
• Compare this to the current rate at 19% = £19,000.

Conclusion

Limited companies will take more than their share of the increased tax burden over the coming years.  For shareholders and company directors, the position looks even bleaker.  After the company having paid corporation tax at those higher rates, shareholders and directors will already be facing the dividend tax rates increase of 1.25%: 

• Non-Taxpayers - no further tax
• Dividend in Basic Rate Tax Band (20.00 %) - tax due at 8.75%
• Dividend in Higher Rate Tax Band (40.00 %) - tax due at 33.75%
• Dividend in Additional Rate Tax Band (45.00 %) - tax due at 39.35%

Add the above higher dividend tax rates to higher corporation taxes already paid and you can see this is getting painful.

Is Pension the Most Tax Efficient Extraction of Profits?

As owner/managers of businesses, taking PAYE salary means accepting the increases in both employer and employee national insurance contributions or taking dividends means higher corporation taxes and higher dividends tax rates.  Perhaps, the most cost-effective solution is to sacrifice salary and/or dividends cut and maximise employer pension contributions.  Employer pension contributions are a direct expense that reduces corporation tax in addition to saving income tax on lower earnings and saving higher taxes on lower dividends received?

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