Understanding Corporation Tax Rates and Group Relief for the 2024-2025 Financial Year

As we step into the new financial year, I thought it would be beneficial to discuss the Corporation Tax rates in the UK due to the recent changes. 

This information will help you plan and manage your finances more effectively. Additionally, if you have multiple companies, it's important to know how group relief can be utilised to optimise your tax liability.

Main Rate and Small Profits Rate

For the financial year starting on 1 April 2024, the Corporation Tax rates are structured to accommodate different levels of company profits. 

The main rate of Corporation Tax is set at 25% for companies with profits exceeding £250,000. This rate applies to the majority of companies and is a significant consideration for your financial planning.

For smaller companies with profits of £50,000 or less, the Corporation Tax rate remains at 19%. This small profits rate is designed to support smaller businesses by reducing their tax burden, allowing them to reinvest more of their earnings back into their operations.

Marginal Relief

Companies with profits between £50,000 and £250,000 will benefit from Marginal Relief. This relief provides a gradual increase in the effective Corporation Tax rate, ensuring that companies transitioning from the small profits rate to the main rate do not face a sudden jump in their tax liability.

The Marginal Relief is calculated using a standard fraction of 3/200, which helps to smooth the tax rate increase for companies within this profit range.

Group Relief for Multiple Companies

When you have multiple companies, and one is making a loss while the other is making a profit, the overall Corporation Tax calculation can be affected by the ability to offset losses against profits. This is known as group relief. Group relief allows losses from one company to be offset against the profits of another company within the same group, thereby reducing the overall Corporation Tax liability.

To qualify for group relief, the companies must be part of the same group. Generally, this means that one company must own at least 75% of the other company's ordinary share capital, or both companies must be owned by a third company that holds at least 75% of their ordinary share capital.

When you offset losses from one company against the profits of another, the taxable profits of the profitable company are reduced. This can potentially bring the profits below the thresholds for the main rate or Marginal Relief, thereby reducing the effective Corporation Tax rate.

For example, if Company A has a profit of £300,000 and Company B has a loss of £100,000, you can offset the loss from Company B against the profit of Company A. This would reduce Company A's taxable profit to £200,000, which may qualify for Marginal Relief and result in a lower effective tax rate.

Planning for Corporation Tax

It's often easier to plan for a Corporation Tax rate of 25%, especially if your company is experiencing growth and making good profits. Underestimating the rate can lead to a shock when your profits exceed the thresholds, resulting in a higher tax liability than anticipated.

By planning for the higher rate, you can ensure that your company is prepared for any eventualities and avoid any unpleasant surprises.

If you have any questions or need further clarification on how these rates and reliefs apply to your business, please do not hesitate to reach out.

Let's work together to make the most of the opportunities and challenges that the new financial year brings.