Now for late summer, a little brainteaser.
To get you in the mood, here’s an appetiser.
Earlier in this issue we set out the three current rates of corporation tax. The first (19%) and last (30%) are easy to locate – they are clearly set out in the statutes. But the 32.75% rate for profits between £300,000 and £1.5m is nowhere to be found in this legislation. So how did we arrive at this figure?
(All the clues are there, in the earlier article on corporation tax.)
- Although the statute doesn’t mention the tax rate of 32.75% for profits between £300,000 and £1.5m, it doesn’t remain totally silent on this issue. Intriguingly, for profits within this range, it mentions a very different number:
11/400ths!
To the uninitiated, this will be totally baffling. It’s rather like a coded message. Almost worthy of the Da Vinci Code (Dan Brown rather than Gordon?)
Can you crack the code? How does 32.75% – to some, a mystery in itself – transmute into 11/400ths?
Alright, we accept that, for accountants, our “brainteaser” is nothing of the sort. It’s child’s play. But, for most other businessmen, we believe it will be something of a struggle.
Here’s the proof of our 32.75% figure:
|
Tax on |
£1,300,000 at 19% is |
£57,000 |
|
Tax on |
£1,200,000 at 32.75% is |
£393,000 |
|
And tax on |
£1,500,000 at 30% is |
£450,000 |
The main event
Where profits exceed the lower threshold – £300,000 if there are no associated companies – corporation tax is charged at the full rate on the whole of the profits in the first instance, and then the amount payable is reduced by “marginal relief for small companies”. Like this.
Assume your company has taxable profits for the year of £150,000. It has two associated companies, so the £300,000 threshold is divided by three and becomes £100,000. The corporation tax liability therefore amounts to £35,375, as follows:
|
Tax on £150,000 at 30% |
£45,000 |
|
Less: 11/400ths of £350,000 |
£9,625 |
|
Corporation Tax payable |
£35,375 |
Still confused? We had better explain the figure of £350,000: it’s the upper threshold of £500,000 (namely £1.5m divided by three because of the associated companies) less the amount of your company’s profits for the year – £150,000.
(S25(b) FA 2006 read with S13(2) TA 1988.)
But why does it all have to be so tortuous?
Robert Bond has been a practising chartered accountant for over 20 years.
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