Budget 2021: steep rise in corporation tax is coming

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Date: 3 March 2021

Houses of parliament in Spring

The chancellor of the exchequer announced a big increase in corporation tax from 2023 and a freezing of income tax thresholds as part of his plans for driving economic recovery after the pandemic.

In his 2021 Budget address, chancellor Rishi Sunak said these were "decisions that no chancellor wants to take" as he went on to announce that corporation tax will go up to 25% (from 19%) from April 2023. And while rates of income tax will not rise (honouring manifesto pledges), tax thresholds are to be frozen between 2022 and 2026.

The inheritance tax threshold, pensions lifetime allowance, annual exempt allowance from capital gains tax and VAT exemption threshold will also be frozen. With inflation and rising wages, all of these measures will bring more money into Treasury coffers.

Behind the headlines, there was some positive news on tax for small businesses. Some 1.5 million of the UK's smallest firms (with profits below £50,000) will continue to pay corporation tax at the current 19% rate after 2023. And there will be a tapering of the rate for those earning profits up to £250,000. Only businesses that earn more than £250,000 in profits each year will pay the full 25% rate.

Business groups have not baulked at the news of a rise in corporation tax, it seems. "While no business will relish paying higher rates of corporation tax in future, the impact of the chancellor's tough decision is blunted by the big new incentives for investment, lower rates for the smallest firms, and the extension of coronavirus support measures in the short term," said Adam Marshall, director general of the British Chambers of Commerce (BCC).

Jonathan Geldart, director general of the Institute of Directors (IoD), said: "The prospect of higher taxes will no doubt bite for many firms that are still tending to wounded balance sheets. Delaying and tiering the corporation tax rise is a pragmatic approach, though adjustments to the plan ​should remain on the table as a clearer picture of the recovery emerges."

The Federation of Small Businesses (FSB) praised the decision to delay the introduction of the higher rate of corporation tax. "The chancellor's commitment to ruling out tax rises until the recovery is underway is the right one," said FSB national chairman Mike Cherry. "The reintroduction of a small business corporation tax rate with a taper is good to see. The taper must be at a reasonable level, especially as directors of small companies have not received a penny in income support."

Steve Taklalsingh, MD at Amaiz, a fintech firm that works with small businesses, welcomed the focus on small firms and the self-employed in the Budget. He said: "We're pleased to see small businesses considered in the corporation tax changes, by excluding those earning under £50k profit from tax increases. However, there is a worry about how this will be managed in the future. If the profit threshold, for example, doesn't increase with inflation, it will provide less incentive for people to start businesses and risk investment."

Rishi Sunak's Super Deduction scheme looks set to soften the tax blow for businesses in the short term - offering an extremely generous 130% tax deduction on investment spending for the next two years.

Michelle Ovens, founder of Small Business Britain, described the Super Deduction scheme as "ambitious" and "innovative" and said it could "unlock unprecedented investment in growth for businesses."

The BCC's Adam Marshall said: "We particularly welcome the massive Super Deduction investment incentive that the chancellor has put in place for the next two years. This responds directly to our call to encourage those businesses, that can, to invest and grow."

Written by Rachel Miller.

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