Changes to Corporation Tax

In addition to the tax burden already placed upon small companies the budget has increased tax on profits for small companies.

A starting rate of corporation tax of 0% was introduced in 2002 and applies to companies with taxable profits of £10,000 or less. Companies with profits between £10,000 and £50,000 enjoy a marginal relief from the small companies’ rate of 19%. The zero rate was introduced to encourage the creation of small businesses and to allow them to grow.

In 2004, the government thought the system was being ‘abused’ and introduced a ‘non-corporate distribution rate’ of 19% on companies to the extent that profits were distributed.

The result has been a complex system and the government has concluded that many self-employed and employed people are still being advised to incorporate simply to reduce their tax and national insurance liabilities.

The government has therefore decided to replace the non-corporate distribution and zero rates with a new single banding set at the current small companies' rate of 19%. Therefore the opportunity to carry over a small amount of profit from one year to the next without paying tax has been removed.

April 2006

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