FINANCE BILL 2002: EXPLANATORY NOTE
CLAUSE 31: CORPORATION TAX - SMALL COMPANIES? RATE AND FRACTION FOR FINANCIAL YEAR 2002
SUMMARY
This clause provides for the small companies? rate of corporation tax for the financial year beginning 1 April 2002 to be 19 per cent, and for the fraction used in calculating marginal relief from the main rate to be eleven four-hundredths.
BACKGROUND NOTE
1. The small companies? rate is being reduced from 20 per cent to 19 per cent. Companies with profits between £50,000 and £300,000 pay at this rate.
2. Companies with profits between £300,000 and £1,500,000 (the lower and upper profits limits) benefit from marginal relief from the main rate. They are charged at an average rate lower than the main (30 per cent) rate, but higher than the small companies? rate. This is achieved by applying the main rate to the full taxable profits, but then reducing the tax charge by a given fraction of the amount by which £1,500,000 exceeds those profits.
3. Marginal relief has the effect of easing the transition from the small companies? rate to the main rate. The changing of the fraction from one fortieth to eleven four-hundredths preserves the gradual transition from the lower to the higher rate.
4. The example below illustrates the effect of marginal relief for a company with taxable profits of £500,000. Its tax liability is calculated as follows:
|
£500,000 @ 30% |
£150,000 |
|
less eleven four-hundredths of |
|
| £1,000,000 (upper limit of | |
| £1,500,000 less the profits of | |
| £500,000) | 27,500 |
| Tax payable: | £122,500. |
5. The same result is achieved by the following calculation:
| £300,000 (profits up to lower limit) at 19% (the small companies? rate) |
£57,000 |
| plus £200,000 (balance of profits) at 32.75% (the ?marginal rate?) |
65,500 |
| Tax payable: |
£122,500. |
6. The one per cent reduction in the small companies? rate saves the company in this example £2,500 on its annual corporation tax bill.
7. Where two or more companies are associated with one another, the profits limit for the small companies? rate are divided by the number of associated companies.
8. Around 150,000 companies pay corporation tax at the small companies? rate, with about a further 20,000 benefiting from marginal relief.