There have been many headlines recently about small businesses being the losers in proposed tax changes. One change is to the corporation tax rate.

If you run your business through a small company, then this change is bad news, as the rate is going up. And there is not just one increase. Previously, a small company paid tax on its taxable profits of 19%. This increased to 20% from 1 April 2007, with further increases planned:

From 1 April 2008 21%

From 1 April 2009 22%

On the other hand, the rate for large companies will decrease from 30% to 28%, from 1 April 2008.

How do I know whether my company is “small”?

There are several different definitions of what “small” means in tax law. In this case, if you own a single company, making taxable profits in a year of less than £300,000, then the company is small.

But don’t get caught out by various ways that this £300,000 limit is reduced. If your circumstances include any of those below, then you could find that you have to pay higher rates, even at low profit levels:

• if you own more than one company;
• if one of your relatives (including your husband or wife), owns a company;
• if you have another business activity with a partner, and that partner has his own company.

There are even some companies (although not generally ones that buy and sell things), which pay at the higher rate whatever their profits.

I don’t understand this - I’m already paying at higher rates than this

It might seem that you are already paying tax at a higher rate than 20%. This is because the above rates are applied to your taxable profits not the profit figure that is shown in your accounts. Confusing? Absolutely. See our article “Tax Deductions” to find out more.