Forthcoming increase in corporation tax rates - what are my options?

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The Spring Budget of 2021 announced that the rate of Corporation Tax (CT) will increase from 19% to 25% with effect from 1 April 2023 for large companies.

“Large” companies for these purposes are those with profits of over £250,000 (or lower if you have more than one company under common control).  Companies whose profits are below £50,000 retain the current 19% rate.  However, companies with profits between £50,000 and £250,000 return to the complexity of marginal relief (essentially paying CT at a rate of 26.50% on profits between the two rates).

A number of profit levels and the corporation tax charges are considered below:

Taxable Profits

CT Now

CT Post April 2023

Difference

£

£

£

50,000

9,500

9,500

Nil

210,000

39,900

51,900

Increase of £12,000

500,000

95,000

125,000

Increase of £30,000


It wasn’t all bad news for companies though, with a temporary extension to the period a company can carry tax losses back to generate a cash tax refund.  This was previously restricted to 12 months but has now increased to three years with a maximum of £2m which can be carried back.  This relaxation applies for accounting periods ending in the period 1 April 2020 to 31 March 2022.

The other announcement for companies was regarding capital expenditure and the “Super Deduction” which is discussed in detail in a separate article (read here).

What does the increase in corporation tax mean for my law firm company?

The above table sets out the increase in tax liabilities for companies, so the obvious question is whether it is still ‘worth’ being a company from a taxation point of view, and is there anything you should do differently?

One option may be to consider paying salaries through PAYE to the director/shareholders rather than dividends.  Currently, many firms and their owners generate an overall lower tax bill by combining a small salary with a higher dividend.  Going forward, with salaries being a deductible expense for CT, and the CT rates increasing, it may no longer be tax beneficial to take dividends in that way.  Increasing salaries may also help with pension contributions, with the allowable limits increasing with a higher salary.  That said, (some) dividends may still be preferred due to their flexibility and the cash flow delay as to when the income tax will be paid.   

The other consideration is a potential disincorporation.   This may not be possible, and even if it is, it may well be fraught with tax and operational difficulties.   There may be income tax charges in extracting assets from the company, and other tax considerations would include capital gains tax, capital allowance charges, transfer of VAT registration and PAYE schemes, and stamp duty land tax if there are any properties within the company. 

It should also be noted that there are still tax advantages to a limited company including the super deduction and R&D tax reliefs which are both only available for companies.  A limited company structure is also more flexible in terms of options for the shareholders if you are looking to reinvest and grow your business.  The limitation in liability is an obvious benefit, but this of course can also be obtained through an LLP structure which is taxed in much the same way as a traditional partnership.


If you would like to further understand the implications for your firm, please contact Rosy by emailing rosy.rourke@armstrong.co.uk or call 0808 144 5575.

Contact Rosy

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