Corporation Tax Rates
Annual corporation tax rate analysis
Corporation Tax rates can now be summarised as follows:
Profits Year Commencing 1st April
2012 2013 2014
Up to £300k 20% 20% 20%
£300k to £1.5M 25% 23.75% 22.5%
Over £1.5M 24% 23% 22%
THERE was much talk on Budget day about the additional 1% cut in the main rate of Corporation Tax from 26% to 24% from 1st April 2012 – but few mentioned that this will only benefit companies with profits over £300,000: smaller companies only pay 20% Corporation Tax anyway!
It is worth remembering that the current Government inherited a main Corporation Tax rate of 28% less than two years ago. A complete alignment of the rates at 20% is now a distinct possibility.
As the Chancellor stated in his speech, within a couple of years we will have a main corporation tax rate that “puts our country within sight of a 20% rate of business tax that would align basic rate income tax, the small companies rate and the corporation tax rate.”
Although it may appear that the latest cut only benefits big businesses, two types of small company owner may also benefit:
- Owners of multiple companies
- Owners of ‘investment companies’
If you have multiple business ventures, you may wish to keep each one in a separate company. This way, each business is ring-fenced from creditors and can be sold off easily and tax efficiently.
If a single company has multiple business activities, it will pay corporation tax if the underlying businesses are sold off individually. But if you sell a stand-alone trading company, you can benefit from Entrepreneurs Relief (10% Capital Gains Tax).
Holding subsidiary companies via a group structure can have even greater benefits – many subsidiaries can now be sold off tax-free.
Property investors often have more than one company: one to hold their properties; another for their other business activities.
There is, however, one major catch to owning multiple companies: if you control more than one company, the 20% corporation tax band is divided up. So if you own three companies, each one will pay 20% corporation tax on only the first £100,000 of profits (£300,000/3), but 25% above this level from 1st April 2012.
Generally speaking, if one person has 100% ownership of two companies, or two persons own 50% each of two companies, the 20% tax band is divided up.
Which brings us back to the Budget: If corporation tax is eventually reduced to 20% for all companies, you will not be penalised for owning multiple companies. Even if the rate applying to profits over £300,000 remains at 22.5% after 2014, this is still a lot lower than the 32.75% that applied a few years ago.
If you want to use a company to hold non-trading assets (e.g. shares, bonds, or assets that produce royalty income) it could classed as a Close Investment-Holding Company (CIC). CICs pay corporation tax at the main rate (24% from 1st April) on ALL of their profits, including their existing trading profits.
This danger also potentially exists if a company holds onto large amounts of surplus cash with no intention of using it in the business. Property investments held by companies do not generally cause a problem, however – provided they are rented to unconnected parties.
If the main corporation tax rate does eventually fall to 20%, there may be no penalty to holding investments through a company. This will allow an existing trading company’s profits to be invested in assets like shares or bonds, without having to extract profits first as taxable dividends.It may also make it more attractive to set up a separate standalone company to hold assets that generate income that would normally be subject to income tax at 40% or 45%.