On 3rd March 2021, a new budget was announced by the UK chancellor. And as expected, there were some minor changes in the previously existing budget. Every eye and every ear waits for what the modified budget brings for them. Either you are an ordinary citizen paying tax, a sole trader, a company owner, or a businessman, you must be waiting for the budget to be announced.
The primary consideration is the specific percentages going up and down and their application on the persons involved in the budget and tax process. The UK budget for 2021 did something like this. Some things remained the same, but some were modified.
Being a business person or a limited company holder, you might be intrigued by the corporation tax percentage. A corporation tax is something that is paid by the business company owner on their profit. Previously, it was nineteen percent if someone crosses the threshold.
Surprisingly, it has been raised to twenty-five percent –the introductory rate. But it’s not a quick move. The twenty-five percent term would be applicable from 6th April 2023, two years from the current year. These two years will hold great importance for limited company owners to finalize and pre-program their strategies regarding the corporation tax of their limited company.
“A corporation tax is something that is paid by the business company owner on their profit. Previously it was nineteen percent if someone crosses the threshold. Surprisingly it has been raised to twenty-five percent –the main rate.”
Twenty-five percentage will be specified for the corporation tax of those limited companies whose pre-tax profit would surpass £250,000. If your limited company has a pre-tax profit of £50,000, then kudos to you because your corporation tax would be demanded on the same nineteen percent tax rate.
What about the pre-profit tax between £50,000 and £250,000? Those limited companies are going to follow which sect? Here a new term is introduced, which is not so much unknown at this time. It’s called marginal relief corporation tax, applicable before 2015 when the systems were significantly simplified. In other words, the soul of marginal relief corporation tax has been revived finally!
”The soul of marginal relief corporation tax has been revived finally!”
The marginal rate applied in marginal relief corporation tax is based on a specific formula derived from marginal fraction value. So, it’s a value between tax used on a threshold below £50,000, which is nineteen percent, and a point above £250,000, which is twenty-five percent. So if you pass the limit of £50 000 instead of paying twenty-five percent on crossing the threshold, the taxpayer enters into another tax region where the tax might be more than nineteen percent and less than twenty-five percent.
It will be suitable for the limited company owners that make not too much profit but unfortunately surpass the upper limit. So accordingly, they will pay less than the exact twenty-five percent tax on the pre-tax profit. Adding further, the marginal rate is not yet finalized. The chancellor would conclude the specific percentage only then a good debate would be initiated on the exact marginal rate.
The word PANDEMIC or CORONA VIRUS is a very new thing that you will figure out in the UK budget 2021. A lot of businesses are affected due to these two words, which in terms of meaning are the same. The trades are affected, and in turn, the profit gained by limited companies is also affected. Thanks to the UK chancellor who introduced many schemes for helping people. Especially those who were left out in the wave of lockdown. Many loan schemes are introduced whose ultimate goal is to help the limited companies manufacture their products and ultimately serve the nation.
The losses made are in turn to be recovered. Many limited companies work day and night to recover the losses in the upcoming years to hit their targets. For some companies, the profit-making process hit millions. The losses made due to lockdown were also in millions. It is the bitter reality of 2020 and 2021 where everything changed due to the entry of the deadly virus. No business person or a limited company owner wants to hear the word loss associated with its trade.
Business losses up to two million pounds can be carried back up to three years. It is applicable for everyone and is specifically for the losses made in 2021 and 2022. Let’s take a deep insight into the issue just created.
The XYZ limited company used to manufacture a product whose sales were in full swing before the pandemic. On 31st March 2020- 2021, the XYZ limited company generated a loss of £50,000. A year before it, on 31st March 2019- 2020, the little company generated a profit of £20,000 and correspondingly paid £3,800 as the corporation tax. A year further before it, in 2018-2019, the same limited company generated a profit of £60,000 and correspondingly paid £11,400 as the corporation tax.
The losses generated would be related to any future profits if future profits will ever happen. It depends on whether the company continues to make profits or losses, and the current loss is tackled accordingly. The current system deals with going back and considering the number hence. You can go back three years to cover the loss. The corporate tax already paid can be used to refund the losses.
The loss made in 2020-2021 was £50,000 which will be recovered by going back in the previous years. A £20,000 profit made in 2019-2020 and a £3000 profit from the original £60,000 profit made in 2018-2019 will cover the loss generated. Correspondingly, a cashback of £3,800 and £5,700 would be granted to XYZ limited company. It is possible due to half of the value from the original. On the whole, cashback or refund or £9,500 would be granted. The refund money needs to be pumped inside the business to cover up the losses.
“The refund money needs to be pumped inside the business to cover up the losses.”
Another term related to corporation tax is super deduction whose details need to be clarified and can be discussed only then. So, on the whole some variations were introduced into the tax system that was the need of hour in the case of pandemic and people need those schemes. Finally it seems that life is back on the track again making the scheme applicable on future investments.