Are you using the most tax-efficient company structure for your business?

From 1 April 2023, the main corporation tax rate will increase to 25% for companies with profits over the upper profits limit of £250,000. A small profits rate of 19% will apply for companies whose profits are equal to or below the lower profits limit of £50,000.

If your company is making profits between the lower and upper limits, you will pay tax at the main rate of 25%. However, this will be reduced by marginal relief. Marginal relief means that the effective rate of corporation tax gradually increases from 19% to 25% as profits increase from £50,000 to £250,000 or more.

However, if you have one or more associated companies, or if your accounting period is less than 12 months, the limits on how much profit your company can make before paying tax are reduced. This is an important consideration when choosing the most tax efficient company structure for your business.

For example, a company with just one associated company (a company where there is common ownership) will see the upper and lower profits limits halved: if your profits are £25,000 or less, you will pay corporation tax at the small profits rate. If your profits fall between £25,000 and £125,000, you will pay tax at 25%, but this will be reduced by marginal relief. If your profits are more than £125,000, you will pay corporation tax at the main rate of 25%.

All this is well and good, but consider the following: what if one of your two companies has a profit of £30,000 and the other has a profit of £15,000. Because you have two companies, the lower tax limit has been reduced to £25,000. That means the business that brings in £30,000 per year will not be eligible for the small profits rate of 19%. However, if your two companies were one company with annual profit of £45,000, the entire sum would only be taxable at the lowest rate of 19%.

There are a number of factors that should influence your decision of which company structure you decide to adopt. However, an undoubtedly important one is your tax liability. With eleven months left before new corporation tax measures come in, you should carefully consider whether restructuring is in your best interest.

If you would like further advice on which company structure will best suit your needs, or would like any more tax information in general, call JW Hinks on 0121 456 0190. Our friendly and professional team of tax experts can ensure that your business is not paying more than it needs to.