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Marginal Relief for Corporation Tax and Its Impact on Corporate Changes
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The UK government brought about major reforms to Corporation Tax effective 1 April 2023. Previously a flat rate of 19%, the system now includes three tiers: detained by a main rate of 25%, a small profits rate of 19%, and Marginal Relief for companies within the rates of these two tiers.
We will outline what these changes mean for your limited company. Regardless of whether you pay the smaller rate or the main rate, or opt for Marginal Relief on your business profits a year, you will be able to grasp how it all works. MMBA has this Corporation Tax up-to-date to assist you in controlling your Corporation Tax.
Table of Contents
What Is Marginal Relief?
Calculating Marginal Relief isn’t as hard as it sounds. The formula is straightforward and provided by HMRC:
Marginal Relief = (Upper Limit – Profits) × Marginal Relief Fraction
Here’s an example:
- Your company’s taxable profits are £60,000.
- The upper limit for profits is £250,000.
- The Marginal Relief Fraction is 1/100.
The calculation would be:
(£250,000 – £60,000) × 1/100 = £1,900
This £1,900 reduces your tax bill, saving you money and easing financial pressure.
How Do You Calculate Marginal Relief?
Calculating Marginal Relief isn’t as hard as it sounds. The formula is straightforward and provided by HMRC:
Marginal Relief = (Upper Limit – Profits) × Marginal Relief Fraction
Here’s an example:
- Your company’s taxable profits are £60,000.
- The upper limit for profits is £250,000.
- The Marginal Relief Fraction is 1/100.
The calculation would be:
(£250,000 – £60,000) × 1/100 = £1,900
This £1,900 reduces your tax bill, saving you money and easing financial pressure.
Why Is Marginal Relief Important for Medium-Sized Businesses?
Marginal Relief is especially useful for medium-sized businesses, it assists them in their dealings with taxes as they expand.
Here are some benefits:
- Lower Tax Bills: It decreases your tax liability that would otherwise be paid to the government thus allowing more capital for your business.
- Better Cash Flow: When you have less to pay towards your taxes you can concentrate on the business growth or other various expenses that may be encountered.
- Encourages Growth: When the tax burden is low, businesses can seek other opportunities to expand their income streams.
- Simpler Tax Planning: Stable tax rates mean that it becomes easy to design strategies that will be in place in the near future.
For businesses in this growth phase, Marginal Relief offers a financial boost without the stress of higher taxes.
Who Can Claim Marginal Relief?
Not all companies fall under the category that is eligible for Marginal Relief. To claim it, your business must:
- Registered in the United Kingdom and should pay Corporation Tax.
- Should have profits between the small profits rate limit and the main rate limit.
- Divide net profit between accounting periods, if your business is located in more than one place or is related to other affiliated organisations.
If your profits exceed the small profits rate you will pay the higher tax rate, if your profits are below the small profits rate, you will simply pay the small profits tax rate. Hence, if they go over the main rate threshold, Marginal Relief is not even an option.
Corporation Tax Rates Explained
The UK’s Corporation Tax rates are split into three categories:
- Small Profits Rate: This rate applies to business entities with relatively low levels of profit.
- Main Rate: It is preferred for larger businesses that are likely to have a higher amount of profits.
- Marginal Rate: This applies to businesses in the middle, offering a smoother transition between the two rates with the help of Marginal Relief.
This tiered system ensures that businesses of all sizes are taxed fairly, taking into account their individual financial situations. If you’re looking to understand how this works in practice, our Corporation Tax Guide provides a clear breakdown.
An Example of Marginal Relief
Let’s look at another example:
- Your company’s taxable profits: £200,000
- The upper limit: £250,000
- Marginal Relief Fraction: 1/100
Marginal Relief = (£250,000 – £200,000) × 1/100 = £500
The £500 will be subtracted from your Corporation Tax bill, so you can spend more on your business development.
How Marginal Relief Impacts Your Tax Planning
It will be significant in terms of tax planning to achieve a reasonable understanding of what Marginal Relief entails.
Here’s how:
- Easier Budgeting: A predictable tax savings means that you will be in a position to make better decisions with regard to costs and investments.
- Reduced Stress: The fact that you know your tax bill is not going to rise offers you peace of mind.
- More Opportunities: Those saved through Marginal Relief can be reinvested in business operations, to hire personnel or purchase new equipment.
At MMBA, as your business tax consultants, we ensure you optimise Marginal Relief and other tax incentives.
Bookkeeping and Tax Tips to Maximise Marginal Relief
To take full advantage of marginal relief, follow these tips:
- Keep Accurate Records: It is important to do all calculations right, therefore tracking all profits and expenses possessed by the company is essential.
- Plan for Tax: To know which tax threshold your profit levels belong to, watch your profit margins.
- Get Expert Help: Consult tax consultants like MMBA to make sure that you get all the relief that you are allowed under the Act.
Good bookkeeping and tax planning can save you time, money, and stress in the long run.
Penalties for Missing Deadlines
Missing a filing deadline can result in penalties. Penalties for late filing of company tax return are:
- 1 day late: £100 penalty
- 3 months late: An additional £100 penalty
- 6 months late: HMRC will estimate your Corporation Tax bill and add a penalty of 10% on the unpaid tax
- 12 months late: Another 10% penalty on any unpaid tax
- If late 3 times in a row: The £100 penalties increase to £500 for each late return
If your tax return is more than 6 months late:
- HMRC will send a “tax determination,” which is their estimate of how much Corporation Tax you owe.
- You cannot appeal against this determination.
- You must pay the estimated Corporation Tax and file your return.
- HMRC will recalculate any interest and penalties after you file your tax return.
Timely tax payments are quite important for compliance and avoiding problems pertaining to legal matters. But you must remember, late payments can disrupt cash flow, so plan and budget accordingly.
Conclusion
Marginal Relief is beneficial to the UK business, especially for those at the growth stage. It helps companies transition smoothly between Corporation Tax rates, reducing their tax bills and freeing up cash for investment.
At MMBA, we are fully aware of how carefully you want to deal with your taxes and ensure that you do not incur any penalties as imposed by HMRC. No matter if you need help with calculating Corporation Tax, planning your taxes, or just with the general financial decision-making for your business, we’ll be there for you.
In this way, Marginal Relief and other smart tax policies will help you to concentrate on extending your business without worry. To get through the whole process successfully and learn how to make the most out of all available opportunities, let MMBA do the job for you.
FAQs
Who can and cannot claim Marginal Relief?
Companies with profits between the small profits rate threshold and the main rate threshold can claim Marginal Relief. Businesses with profits below or above these limits cannot.
What’s the Corporation Tax main rate?
The main rate of Corporation Tax in the UK is 25%, which applies to companies with profits above £250,000.
How does marginal rate Corporation Tax work?
Marginal Relief reduces the tax rate gradually for companies with profits between the small profits rate (£50,000) and the main rate (£250,000), easing the jump in tax bills.
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