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Example
A business prepares accounts to 30 June every year. Currently, income tax calculations for 2024/25 would be wholly based on the profits for the year ended 30 June 2024. The change will mean that the income tax calculations for 2024/25 will be based on 3/12 of the profits for the year ended 30 June 2024 and 9/12 of the profits for the year ended 30 June 2025.
This change will potentially accelerate when business profits are taxed but transitional adjustments in 2023/24 are designed to ease any cashflow impact of the change.
Comment
An estimated 93% of sole traders and 67% of trading partnerships draw up their accounts to
31 March or 5 April and thus the current rules are straightforward and the proposed changes will not affect them. Those with a different year end might wish to consider changing their accounting year end to simplify compliance with tax rules.
Corporation tax rates
The main rate of corporation tax is currently 19%. In the Spring Budget 2021, the Chancellor announced the rate would remain at 19% until 1 April 2023 but the rate will then increase to 25% for companies with profits over £250,000. The 19% rate will become a small profits rate payable by companies with profits of £50,000 or less. Companies with profits between £50,001 and £250,000 will pay tax at the main rate reduced by a marginal relief, providing a gradual increase in the effective corporation tax rate.
Capital allowances
Plant and machinery
Most corporate and unincorporated businesses
are able to utilise a £200,000 annual investment allowance (AIA) to claim 100% tax relief on their qualifying expenditure on plant and machinery. The allowance was temporarily increased to £1 million for expenditure incurred on or after 1 January 2019 and was due to revert back to £200,000 from 1 January 2022.
The £1 million allowance will now be retained until 31 March 2023.
Transitional rules will apply to accounting periods that span 1 April 2023.
For companies, this aligns the end of the temporary AIA with the end of the ‘super-deductions’ as announced by the government in Spring Budget 2021.
A reminder of super-deductions
Between 1 April 2021 and 31 March 2023, companies investing in qualifying new plant and machinery are able to benefit from new capital allowances, termed ‘super-deductions’ or ‘first year allowances’, as follows:
• a super-deduction of 130% can be claimed on most new plant and machinery investments that ordinarily qualify for the 18% main rate writing down allowances
• a first year allowance of 50% can be claimed on most new plant and machinery investments that ordinarily qualify for the 6% special rate writing down allowances.
These reliefs are not available for unincorporated businesses.
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Business