Contractors’ Questions: Can I receive £100,000 in limited company profit in two £50k chunks so I just pay 19% on each?

Contractor’s Question: I haven't used my limited company since January 2022, and no longer have plans to. I must close it down by January 2025 otherwise I can’t obtain Business Asset Disposal Relief (formerly Entrepreneurs’ Relief).

I expect to receive a final £100,000 of profit before I wind-up and can apparently choose when that profit is received. My company’s financial year ends July 31st. Ideally I'd like to split the profit so it's two chunks of £50,000, with the intended effect of paying corporation tax at only 19%.

But although I can make the profit span two company financial years, I'm aware I’ve got no choice now but for it to arise in 2024/25's tax year.

My question is; when does the first £50,000 at 19% get ‘reset’? Is it at the end of the tax year (April 5th 2025) or at the end of the company financial year (July 31st)? If the former, then I'm presumably boxed in, and must pay a higher corporation tax rate, although I think I'll still get some marginal relief; right?!

Experts Answer: New corporation tax rates have been in force since April 6th 2023 - for annual company profits exceeding £50,000. As your company’s financial year runs from August 2023 to July 2024, profits for that period will be subject to the new rates.

Company financial year matters most

It’s the accounting period date that matters, not the tax year.

Here’s a breakdown that might help:

• Profits up to £50,000 are taxed at 19%.
• Profits over £250,000 are taxed at 25%.

For profits between £50,000 and £250,000, the effective tax rate increases from 19% to 25% using a mechanism that HMRC calls ‘marginal relief.’

The corporation tax return calculates this as 25% of the total profit, less the relief, giving an effective, overall rate of between 19% and 25%.

Corporation tax rates which contractors like you should keep in mind

A simpler way to understand the above is:

• The first £50,000 profits are taxed at 19%
• Any remaining profits are taxed at 26.5%

The total tax can be found using the formula:

(26.5% × Total Profits) − £3,750

If part of the profits includes dividends, the calculation will differ slightly. However, this only applies to profits up to £250,000; for profits over this, the tax is 25%.

Ask your accountant to create another (longer) accounting period

If you were to create another accounting period after July 31st 2024, such as from August 1st 2024 to January 31st 2025, there would be another ‘allowance’ for certain profits before higher rates apply.

The £50,000 ‘small profits’ band and the £250,000 upper limit are pro-rated based on the days within the accounting period. For a six-month period, the ‘small profits’ rate would be £25,000.

So, I’d suggest there would certainly be some benefit to having another accounting period after July, and it would be in your interest to make this period last as long as possible.

Note also that income should be recognised according to the accounting period in which it is earned. This is crucial when selecting the period to apply it to.

BADR considerations as a limited company

When it comes to company liquidation, Business Asset Disposal Relief (BADR) allows a 10% capital gains tax on final distribution payments.

This is instead of the usual rates of 10% for basic rate taxpayers and 20% for higher rate taxpayers.

If your BADR entitlement expires in January 2025, ensure distributions are received by then to qualify.

Prepare final accounts early

My advice here would be to make sure your final company accounts are prepared, and the liquidation process started, at least three months before the end of the calendar year. The potential BADR savings are more significant than the corporation tax advantage of extending the period beyond July 2024. Thus, preparing final accounts early is the priority.

I hope this answers your questions. For any further advice, please don’t hesitate to reach out to one of our team.

The expert was Lara Hodkinson, head of accounting at Danbro.