On March 3rd, 2021, Chancellor Rishi Sunak announced in his budget speech that the UK corporation tax rate would increase from 19% to 25% from April 2023. This change represents the first time corporation tax has been raised in the UK since 1974. The announcement has sparked a lot of discussion and debate about its potential impact on businesses, the economy, and the country as a whole.
Corporation tax is a tax on the profits made by UK-resident companies and foreign companies with a UK branch. The tax is calculated on the profits the company makes after deducting any allowable expenses. The current rate of 19% has been in place since April 2017 and is one of the lowest corporation tax rates in the G7.
The proposed increase to 25% will only apply to companies with profits over £250,000. Small businesses with profits under this threshold will continue to pay corporation tax at the current rate of 19%. The government estimates that only 10% of companies will be affected by this change.
The reason for the tax rise is to help pay for the cost of the COVID-19 pandemic. The pandemic has caused the UK economy to contract by 9.9% in 2020, the biggest drop in GDP since 1709. The government has had to spend billions of pounds to support businesses and individuals through the crisis. The increase in corporation tax is expected to raise around £17 billion per year by 2025-26.
Supporters of the tax rise argue that it is necessary to help rebuild the economy and pay for the cost of the pandemic. They argue that businesses have benefited from government support during the crisis and should contribute more to help repay the debt incurred. They also argue that the UK corporation tax rate is still relatively low compared to other countries, even after the increase.
Opponents of the tax rise argue that it will damage the competitiveness of UK businesses and discourage foreign investment. They argue that businesses will have less money to invest in growth and job creation, which could lead to a slower economic recovery. They also argue that the tax rise will be passed on to consumers in the form of higher prices, and that it will disproportionately affect small and medium-sized businesses.
The impact of the tax rise on the UK economy is uncertain and will depend on a variety of factors. It is possible that some businesses may choose to relocate to countries with lower tax rates, while others may choose to invest less in the UK. However, it is also possible that the tax rise could be offset by other government policies, such as investment in infrastructure and education.
In conclusion, the corporation tax rise announced in the UK budget has sparked a lot of discussion and debate. While supporters argue that it is necessary to help rebuild the economy and pay for the cost of the pandemic, opponents argue that it will damage the competitiveness of UK businesses and discourage foreign investment. The impact of the tax rise on the UK economy remains to be seen, and it will be important to monitor the situation closely in the coming years.
If you don’t currently have a tax review during your trading year with your accountant, please contact us as we offer these as standard.