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Tax Shield Formula:
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A tax shield is a reduction in taxable income achieved through claiming allowable deductions such as interest expenses. In the UK context, it refers to the tax savings resulting from deductible interest expenses under the corporation tax system.
The calculator uses the Tax Shield formula:
Where:
Explanation: The formula calculates the amount of tax savings generated by deductible interest expenses, reducing the overall tax liability of a corporation.
Details: Calculating tax shield is crucial for corporate financial planning, capital structure decisions, and understanding the true cost of debt financing. It helps businesses optimize their tax position and improve after-tax profitability.
Tips: Enter interest expense in GBP and the corporation tax rate as a decimal (e.g., 0.19 for 19%). Both values must be valid (interest ≥ 0, tax rate between 0-1).
Q1: What is the current UK corporation tax rate?
A: As of 2024, the main rate is 25% for profits over £250,000, with a small profits rate of 19% for profits under £50,000. Always check HMRC for the latest rates.
Q2: Are all interest expenses tax deductible in the UK?
A: Most interest expenses are deductible, but there are restrictions under the corporate interest restriction (CIR) rules which limit deductions to 30% of EBITDA in certain circumstances.
Q3: How does tax shield affect company valuation?
A: Tax shields increase company value by reducing tax payments, thereby increasing after-tax cash flows available to shareholders.
Q4: Can individuals benefit from tax shields?
A: While this calculator focuses on corporate tax shields, individuals can also benefit from various tax deductions and allowances in the UK tax system.
Q5: How often should tax shield calculations be updated?
A: Tax shield calculations should be reviewed annually or whenever there are significant changes in interest expenses, tax rates, or corporate structure.