In the complex landscape of business finance, the topic of taxation is an ever-evolving conversation. With multiple changes initiated by the UK government, business owners must remain aware of the latest developments to ensure compliance and to optimise their financial planning. This article will delve into the latest changes in UK corporate taxation, with an emphasis on how these shifts impact small businesses.
The corporation tax rate is a tax imposed by the government on the profits acquired by businesses. This tax is levied at the end of each financial year and significantly affects a company's net income.
In April 2024, the UK government announced a significant change in the corporation tax rates. The standard rate, previously 19%, will rise to 25% from April 2025. However, this increase will principally affect larger businesses with profits above £250,000. Small businesses with profits under £50,000 will continue to pay the current rate of 19%, providing some relief for these entities.
This new tax policy introduces a tapering system, where businesses earning between £50,001 and £249,999 will pay a tax rate between 19% and 25%, based on their profits. This progressive system aims to balance the tax burden among different-sized businesses.
Investment and capital expensing is a significant area of taxation that impacts businesses. In this context, 'expensing' refers to the process of deducting the cost of purchasing assets, such as machinery or equipment, from a company's taxable income.
In a bid to encourage investment in the British economy, the government introduced the 'Super-Deduction' scheme in April 2023. This scheme allows companies to claim 130% capital allowances on qualifying plant and machinery investments until March 2025. Therefore, for every pound a company invests, their taxes are cut by up to 25p.
This policy is particularly beneficial for small businesses as it encourages investment in their growth, enabling them to deduct more than the actual cost of buying equipment from their taxable profits.
Business rates, also known as non-domestic rates, are a tax on properties used for business purposes. They are calculated based on the property’s 'rateable value', which is its estimated open market rental value.
The UK government has extended the business rates relief scheme in response to the financial impact of the COVID-19 pandemic. For the year 2024/2025, businesses in the retail, hospitality and leisure sectors will receive a 66% discount on business rates, capped at £2 million per business. This policy aims to support these hard-hit sectors as they recover from the pandemic's effects.
For small businesses not in these sectors, the Small Business Rates Relief scheme may provide relief. Under this scheme, businesses using one property with a rateable value under £15,000 will pay no business rates at all.
For many small businesses in the UK, especially those operating through Personal Service Companies (PSC), changes to income tax and National Insurance Contributions (NICs) are of particular importance.
From April 2024, the government has increased the higher rate threshold for income tax and NICs to £50,270. This change means that individuals will not have to pay 40% income tax until their income exceeds this threshold, providing a welcome relief for many.
In addition, the government announced significant changes to the off-payroll working rules, also known as IR35, in April 2021. These changes shift the responsibility for determining a contractor's employment status from the individual to the client company. For small businesses, this means increased administrative duties and potential legal implications.
Navigating changes in corporate taxation can be a challenge for small businesses. However, by understanding and adapting to these changes, companies can optimise their financial planning and potentially increase their profits.
The impact of the full expensing policy is another pertinent aspect of corporate taxation changes affecting small businesses. This policy, also known as 100% capital allowances, allows businesses to instantly deduct the full cost of certain types of business-related equipment purchases, rather than depreciating the costs over several years.
Introduced by the UK Government in April 2023, the full expensing policy has a two-fold benefit for small businesses. Firstly, it incentivises businesses to invest in plant machinery, equipment, and other qualifying assets, thereby fuelling business growth and economic expansion. Secondly, by permitting companies to immediately deduct the cost of qualifying capital investments from their taxable profits, the policy effectively lowers the tax base, thereby reducing the corporation tax payable.
However, it's noteworthy that the full expensing policy works in tandem with the super-deduction scheme. The latter allows businesses to claim 130% capital allowances on qualifying investments until March 2025. This means that for every pound invested in a qualifying asset, the company's tax bill is reduced by up to 25p. These two policies together seek to make the UK's capital allowances regime more attractive and competitive, thereby encouraging more investment and innovation.
Marginal relief is another significant aspect of the recent changes in UK corporate tax legislation. As we've seen, a tapering system has been introduced for businesses with profits between £50,001 and £249,999. This system is designed to progressively increase the tax rate from 19% to 25% based on profit levels, thereby ensuring a more equitable distribution of the tax burden among businesses of different sizes.
However, the new policy also includes a provision for marginal relief. This relief is intended to smooth the transition from the small profits rate to the main rate, thereby preventing businesses from facing a sudden, steep increase in their corporation tax. In essence, marginal relief ensures that the effective rate of tax increases gradually, rather than abruptly, for businesses as they move from the lower to the higher tax threshold.
Under the marginal relief provision, the additional tax payable by companies earning between £50,001 and £249,999 is limited to a fraction of their profits over £50,000. This ensures that the effective tax rate for these companies remains lower than the main rate of 25%. Thus, even as they scale up their operations and increase their profits, they won't be unduly penalised by higher tax rates.
It's important for small businesses to understand that while the marginal relief doesn't eliminate the higher corporation tax, it does help to mitigate its impact and protect their bottom line.
In light of these latest changes in UK corporate taxation, it's evident that small businesses are at the forefront of the government's considerations. While the rise in corporation tax rates may initially appear daunting, the introduction of the tapering system and marginal relief provisions ensure that smaller businesses aren't unduly burdened.
Moreover, the super-deduction and full expensing policies provide potent incentives for small businesses to invest in their growth by allowing them to deduct more than the actual cost of capital investments from their taxable profits.
Finally, the extension of business rates relief and changes to income tax thresholds offer further financial reprieve for small businesses. Therefore, while navigating the complex landscape of corporate taxation can be challenging, understanding and adapting to these changes can lead to enhanced financial planning and potential profit increases for small businesses in the UK.