New tax changes in the UK went into effect on April 1, 2023, that impacted the corporation tax rate.
As a UK eCommerce business owner, understanding these changes is important so you can pay the appropriate amount of tax. But you also don’t want to pay more than you’re required to.
Understanding the changes and ways to reduce your taxes ensures you pay only what you owe.
What is this tax increase?
Businesses registered within the UK are required to pay the corporation tax.
Starting on April 1, 2023, the corporation tax increased from 19% to 25% — but only for some businesses. The tax rate you pay varies depending on your company’s reported profits.
Here is the breakdown of the corporation tax rates.
- Companies with profits up to £50,000 continue to pay a 19% corporation tax (called the small profits rate).
- Companies with profits above £250,000 now pay a 25% corporation tax rate (called the main rate).
- Companies with profits between £50,000 and £250,000 pay the main rate, but it’s reduced by a marginal relief — reducing the corporation tax below the 25% rate.
Marginal relief allows a more gradual increase in the corporation tax rate for businesses earning more than £50,000 but less than £250,000. Since the rate varies, the UK government has a marginal relief calculator to help companies calculate their marginal relief.
However, if you run more than one limited company, the £50,000 and £250,000 marginal relief thresholds will change depending on the number of companies (called associated companies).
Why are income taxes increasing?
The government increased the corporate tax rate to increase revenue, which is estimated to add £18 billion per year for the government.
That said, the government estimated that most companies, about 70%, will continue to be taxed at the small profits rate of 19%. Additionally, the government states that the increased corporation tax rate is still the lowest in the G7 group of advanced economies.
What does this mean for UK eCommerce business owners?
UK eCommerce business owners who report profits below £50,000 won’t experience an increase in their corporate taxes.
That said, those with reported profits above £50,000 or who have associated companies will need to carefully assess their corporate tax rate, including looking for deductions or tax liabilities to accurately assess their taxable profit. This ensures you don’t pay more corporation tax than you’re supposed to.
6 strategies for minimizing individual income
There are no loopholes to get around this tax increase short of decreasing your profits and individual incomes.
1. Claim all allowable business expenses
Claiming all business expenses you’re eligible for, such as costs of sales and overheads, can help reduce your corporation tax liability.
Some common allowable business expenses include:
- Salaries and subcontractors pay
- Employee benefits
- Stock and raw materials for resale
- Advertising and promotional costs
- Product storage and distribution costs
- Discounts to wholesalers and distributors
2. Determine if your eCommerce business is eligible for R&D tax relief
Research and development (R&D) tax credits can be significant for those eCommerce businesses that qualify, such as developing their own systems or modifying off-the-shelf software.
For example, qualifying costs could include employment costs of software developers, their employer pension, or software costs for the R&D project.
3. Claim work-from-home allowances
You may qualify for work-from-home tax relief for additional household costs if you work at home permanently or part of the week. However, you can only claim things used solely for work.
Also, consider creating a rental agreement between yourself and your business with your property as a home office. Your eCommerce business can claim corporation tax relief on the rent payments. But, you may have to pay income tax on the money you earn on rent. So make sure this arrangement helps you save money.
4. Create a company pension fund
Businesses that provide pension contributions can get a deduction from their profits, reducing their corporation tax.
5. Claim business losses
Use eligible business losses to reduce your corporation tax. Additionally, some losses can be carried forward against future profits.
6. Pay your corporation tax bill early
HMRC will pay you a credit interest if you pay your corporation tax early.
Typically, you get interest from the date you paid to the payment deadline, with interest starting six months and 13 days after the start of your accounting period. The current repayment interest rate is 3.25% from April 13, 2023.