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Unlocking Tax Savings: A Comprehensive Guide to Marginal Relief by S & B Accountants Limited
Are you a UK-based company looking to optimize your Corporation Tax expenses? The Marginal Relief scheme introduced on April 1, 2023, might be your ticket to substantial tax savings. S & B Accountants Limited is here to guide you through the intricacies of Marginal Relief and how it can work to your advantage.
Demystifying Marginal Relief
As of April 1, 2023, the Corporation Tax landscape will undergo a transformation. The tax rates will be structured as follows:
• 19% for taxable profits below £50,000 (referred to as the “small profit rate”).
• 25% for taxable profits exceeding £250,000 (known as the “main rate”).
Marginal Relief acts as a bridge between these tax rates, allowing you to gradually reduce your tax liability from the higher 25% main rate to a more favorable rate.
Who Qualifies for Marginal Relief?
Your company or organization may be eligible for Marginal Relief if your taxable profits, starting April 1, 2023, fall within the range of:
• £50,000 (the lower limit)
• £250,000 (the upper limit)
It’s essential to note that if your accounting period is less than 12 months, these limits are adjusted proportionately. Additionally, the presence of associated companies can influence these limits. For instance, if your company is associated with three other companies, the lower limit decreases to £12,500, and the upper limit rises to £62,500.
However, certain entities are ineligible for Marginal Relief, including non-UK resident companies, close investment holding companies, and companies with profits exceeding £250,000, which includes distributions from unrelated or unassociated companies.
Key Considerations
To make the most of Marginal Relief, consider the following factors:
Active Associated Companies: Determine if your company had any active associated companies between April 1, 2023, and July 31, 2023. Companies are considered associated if one company controls the other or if both companies are controlled by the same person or persons.
Distributions: Assess whether your company received distributions. Distributions encompass dividends from investments, distributions of assets, amounts treated as distributions during asset or liability transfers, and bonus issues following share capital repayment.
Real-World Examples
Let’s explore how Marginal Relief can impact your tax liability with a couple of practical examples:
Example 1:
• Accounting Period: August 1, 2022, to July 31, 2023
• Company’s Profit: £75,000
• Distributions: £0
• Associated Companies: 0
In this scenario, Marginal Relief resulted in £873.97, reducing its Corporation Tax liability from £15,754.11 to £14,880.14, with an effective tax rate decrease from 21% to 19.84%.
How it’s calculated
| Corporation Tax liability breakdown for the accounting period | |||
| No header | 2022 to 2023 | 2023 to 2024 | Overall |
| Days allocated to each financial year | 243Days | 122Days | 365Days |
| Corporation Tax liability before Marginal Relief | £9,486.99 | £6,267.12 | £15,754.11 |
| Marginal Relief | £0 | -£873.97 | -£873.97 |
| Corporation Tax liability after Marginal Relief | £9,486.99 | £5,393.15 | £14,880.14 |
Effective tax rate
19.84%
Reduced from 21% after Marginal Relief
Effective tax rate breakdown for your accounting period | |||
| No header | 2022 to 2023 | 2023 to 2024 | Overall |
| Days allocated to financial year | 243Days | 122Days | 365Days |
| Corporation Tax main rate before Marginal Relief | 19% | 25% | 21% |
| Effective Corporation Tax rate after Marginal Relief | 19% | 21.51% | 19.84% |
£873.97 is the Marginal Relief for your accounting period
For financial year 2022 to 2023 (243 days)
Marginal Relief was not available in financial year 2022 to 2023
For financial year 2023 to 2024 (122 days)
| This is a table describing the Marginal Relief calculation in detail. | |||
| No header | Calculation variables | Calculation | Result |
| Step 11 | Adjusted upper limit | £250,000 upper limit × (122 days ÷ 366 days) ÷ (0 associated companies + 1 original company) | £83,333.33 |
| Step 22 | Taxable profit | £75,000 × (122 days ÷ 365 days) | £25,068.49 |
| Step 33 | Taxable profit including distributions | (£75,000 + £0) × (122 days ÷ 365 days) | £25,068.49 |
| Step 44 | Marginal Relief fraction | The set fraction used by HMRC to provide a gradual increase in rate | 3 ÷ 200 |
| Step 55 | Full calculation | (£83,333.33 – £25,068.49) × (£25,068.49 ÷ £25,068.49) × (3 ÷ 200) | £873.97 |
Marginal Relief formula is:
(Adjusted upper limit – taxable profit including distributions) × (taxable profit ÷ taxable profit including distributions) × (Marginal Relief fraction)
Example 2:
- Accounting Period: April 1, 2023, to March 31, 2024
- Company’s Profit: £75,000
- Distributions: £0
- Associated Companies: 0
In this scenario, Marginal Relief resulted in £2,625 of tax savings, bringing the Corporation Tax liability down from £18,750 to £16,125, with the effective tax rate reduced from 25% to 21.50%.
| How it’s calculated: Corporation Tax liability breakdown for the accounting period | |
| No header | 2023 to 2024 |
| Days allocated to financial year | 366Days |
| Corporation Tax liability before Marginal Relief | £18,750.00 |
| Marginal Relief | -£2,625.00 |
| Corporation Tax liability after Marginal Relief | £16,125.00 |
Effective tax rate
21.50%
Reduced from 25% after Marginal Relief
Effective tax rate breakdown for your accounting period | |
| No header | 2023 to 2024 |
| Days allocated to financial year | 366Days |
| Corporation Tax main rate before Marginal Relief | 25% |
| Effective Corporation Tax rate after Marginal Relief | 21.50% |
How we calculated your Marginal Relief
Check the calculation in detail to see how we calculated your Marginal Relief.
How it’s calculated
£2,625
Marginal Relief for your accounting period
For financial year 2023 to 2024 (366 days)
| This is a table describing your Marginal Relief calculation in detail. | |||
| No header | Calculation variables | Calculation | Result |
| Step 11 | Adjusted upper limit | £250,000 upper limit × (366 days ÷ 366 days) ÷ (0 associated companies + 1 original company) | £250,000 |
| Step 22 | Taxable profit | £75,000 × (366 days ÷ 366 days) | £75,000 |
| Step 33 | Taxable profit including distributions | (£75,000 + £0) × (366 days ÷ 366 days) | £75,000 |
| Step 44 | Marginal Relief fraction | The set fraction used by HMRC to provide a gradual increase in rate | 3 ÷ 200 |
| Step 55 | Full calculation | (£250,000 – £75,000) × (£75,000 ÷ £75,000) × (3 ÷ 200) | £2,625 |
Harnessing Marginal Relief for Your Company
Understanding Marginal Relief and its potential impact on your tax liability is crucial for effective tax planning. By analyzing your taxable profits and accounting period, you can strategically reduce your Corporation Tax burden, freeing up valuable resources for your business’s growth and development.
In summary, Marginal Relief offers a valuable opportunity for companies like yours to minimize their tax obligations. To leverage this relief effectively, consider consulting tax professionals who can provide tailored advice based on your specific financial situation and objectives.
For inquiries or assistance regarding Marginal Relief and other tax-related matters, reach out to S & B Accountants Limited. Our expert team is dedicated to helping you navigate the intricacies of taxation to ensure the financial success of your company.
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