Corp Tax & Marginal relief calculation?


B

Bill D

Hi all,

I'm trying to forecast what my corporation tax liability may well be in a
few months time. The Inland Revenue wesbite and published literature is very
vague about marginal relief however. Could someone please comment on my
understanding example below...?

Annual Turnover £320,000
Nett Profit after operating expenses £100,000

First £10,000 of profit - Nil Corp Tax

£10,001 to £50,000 = £39,999 x 19% = £7,600 ..... less marginal relief of
19/400 of the £7,600 = £361. Therefore £7,600-£361 = £7,239

£50,001 to 100,000 = £49,999 x 19% = £9,500

Grand total = £Nil + £7,239 + £9,500 = £16,739

Have I understood and calculated this correctly?

Thanks
 
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J

Jonathan Bryce

Bill said:
Hi all,

I'm trying to forecast what my corporation tax liability may well be in a
few months time. The Inland Revenue wesbite and published literature is
very vague about marginal relief however. Could someone please comment on
my understanding example below...?

Annual Turnover £320,000
Nett Profit after operating expenses £100,000

First £10,000 of profit - Nil Corp Tax

£10,001 to £50,000 = £39,999 x 19% = £7,600 ..... less marginal relief of
19/400 of the £7,600 = £361. Therefore £7,600-£361 = £7,239

£50,001 to 100,000 = £49,999 x 19% = £9,500

Grand total = £Nil + £7,239 + £9,500 = £16,739

Have I understood and calculated this correctly?
No.

On £100,000 profit, you will pay 19% on the whole lot. No marginal relief
is available.
 
B

Bill D

Thanks for the reply Jonathan.... so, unlike PAYE tax, you don't get the
relif for the bracket you've just exceeded then? So to make any savings it
would have to be either sub £10k for absolutely no corp tax, or between
£10,001 to £50,000 to have to pay 19/400ths of the total profit?

Is this understanding correct?

Thanks again
 
M

Martin

Bill D said:
Thanks for the reply Jonathan.... so, unlike PAYE tax, you don't get the
relif for the bracket you've just exceeded then? So to make any savings it
would have to be either sub £10k for absolutely no corp tax, or between
£10,001 to £50,000 to have to pay 19/400ths of the total profit?

Is this understanding correct?
You may find it easier to calculate CT as...

First £10k or part thereof - 0%, PLUS
next £40k or part thereof - 23.75% PLUS
next £250k or part thereof - 19% PLUS
next £1,200k or part thereof - 32.75% PLUS
everything else (i.e. above £1.5m in total) - 30%

The result is the same - but the IR likes to see it calculated using
"marginal relief" where applicable.

Also note that if your draw any divs, having paid less than 19% CT on them,
then you have to pay additional CT to bring the effective rate up to 19%.
(The rules of this are a bit involved, and don't apply unless taxable
profits are < £50k, so are not likely to apply in your case).

HTH
 
B

Bill D

This has confused me somewhat Martin, and appears to disagree with the
earlier reply of a flat 19% of ALL of the £100K profits??

Any comment?
 
D

Dave

This has confused me somewhat Martin, and appears to disagree with the
earlier reply of a flat 19% of ALL of the £100K profits??

Any comment?
that's a good idea
 
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M

Martin

Bill D said:
This has confused me somewhat Martin, and appears to disagree with the
earlier reply of a flat 19% of ALL of the £100K profits??

Any comment?
There's no disagreement.

19% on the £100k is correct. And if you do the sums using the rates I've
given you, you'll get the same result.

But if you need to, you can use the rates I've given to calculate CT on any
profits - from nil to zillions. It's only 19% if profits are between £50k
and £300k.

If you're stuck on that, then do take professional advice (I'm available,
natch ;-) as are most of the people here!)
 
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R

Ronald Raygun

Bill said:
This has confused me somewhat Martin, and appears to disagree with the
earlier reply of a flat 19% of ALL of the £100K profits??

Any comment?
It may help you to think of it graphically. Plot Corp Tax vertically
against pre-tax profit horizontally. The relevant curve is a number
of straight line segments all joined up. The first segment goes from
(0,0) to (10000,0), which means that for any profit in the range NIL
to £10k, tax is NIL. The next bit goes from (10k,0) to (50k,9500).
This means that if profit is £50k, CT will be £9500 (which is 19% of
£50k).

Significantly, observe that the slope of the first segment is 0, while
that of the second is 0.2375 (i.e. 9500 divided by 40k).

The official way of calculating marginal relief in the 10k to 50k
band is to presume first that 19% tax is payable on the whole profit,
and then to "correct" this by appling a relief calculated using the
fraction 19/400. What this means is that you take the margin (i.e.
difference) between actual profit and 50k, multiply this by the
official relief fraction, and then subtract this from the would-be
19% of the profit.

So if, for example, the profit is £11k, your first approcimation to
the correct tax is £2090, being 19% of £11k. Then you work out the
margin between £11k and £50k, which is £39k. Multiply this by 19/400
and you get £1852.50, which you subtract from £2090 to get £237.50.
This is the actual tax payable, and also happens to be 23.75% of £1k.

This works for any amount A in the £10k to £50k range, because

0.19*A - (19/400)*(50k-A) = 0.2375*(A-10k)

The third segment goes from where we left off (50k,9500) to (300k,57k).
This segment not only has slope 0.19, but if extended it would pass
through (0,0), so for every point (X,Y) on it, Y is in fact 0.19*X.

The 4th segment goes from (300k,57k) to (1500k,450k), and the 5th
"segment" is a half line, going from (1500k,450k) to infinity with
a 0.3 slope. If extended, (0,0) would also lie on it.

The marginal relief applying to profits between 300k and 1500k again
assumes you start with a "30% on the whole lot" assumption, and then
apply marginal relief using the fraction 11/400 (by multiplying it
by the difference between the profit and 1500k. For any amount P it
is also true that

0.3*P - (11/400)*(1500k-P) = 0.3275*(P-300k) + 0.19*300k

And of course another way to determine the slope of the 4th segment
is simply to divide its height (450k-57k=393k) by its width
(1500k-300k=1200k). 393/1200 = 0.3275.
 

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