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CLAUSE 56: CORPORATION TAX – STARTING RATE AND FRACTION FOR FINANCIAL YEAR 2001

SUMMARY

This clause provides for the starting rate of corporation tax for the financial year beginning 1 April 2001 to be 10 per cent, and for the fraction used in calculating marginal relief above the starting rate to be one fortieth (the same as for the previous year).

BACKGROUND NOTE

1.      Companies with profits of up to £10,000 pay corporation tax at the starting rate. The starting rate was introduced from April 2000. (Before then, these companies were liable at the small companies’ rate.) 

2.      As with the small companies’ rate, marginal relief is given to companies with higher profits up to a certain limit. Companies with profits between £10,000 and £50,000 benefit from this relief.   They are charged at an average rate lower than the small companies’ (20 per cent) rate, but greater than the starting rate.  The small companies’ rate is applied to the profits, and then the tax charged is reduced by a given fraction of the amount by which £50,000 exceeds those profits.

3.      The example below illustrates the effect of marginal relief for a company with taxable profits for £20,000.  Its tax liability is calculated as follows:

£20,000 at 20%                                             £4,000           

            less one fortieth of £30,000

            (upper profits limit of £50,000

            less the profits of £20,000)                           £750

            Tax payable                                                    £3,250

The same result is achieved by the following calculation:

       £10,000 at 10% (the starting rate)              £1,000

       plus £10,000 at 22.5%                                 £2,250

       Tax payable                                                    £3,250.

4.      As with the other rates, where two or more companies are associated together, the profits limits for the starting rate are divided by the number of associated companies.

5.      About 135,000 companies and unincorporated bodies pay at the starting rate, with a further 140,000 benefiting from marginal relief.  Together, these comprise around 60 per cent of all corporation tax payers.