The government is increasing the rate of corporation tax for the country’s largest businesses to 25% from 2023 while introducing a ‘super deduction’ tax relief for those investing in new equipment.
From April 2023 the rate of corporation tax paid on company profits in excess of £250,000 will increase from 19% to 25%.
But for profits up to £50,000, the rate will remain at 19% and there will be tapering relief for businesses with profits under £250,000 so that they pay less than the main rate.
Chancellor Rishi Sunak said the move was the “fairest way to continue to fund excellent public services” with companies contributing in recognition of the support they have received from government during the Covid pandemic.
The financial support for individuals, businesses and public services set out at Spending Review 2020 and the budget totals £352bn across this year and next year, Sunak said.
Sunak noted that the date of implementation, 2023, is well after the economy is predicted to have regained its pre-pandemic peak – and even at 25% the rate will remain the lowest among the G7 economies.
The right thing to do
Furnley House IFA Paul Fazackerley said while not everyone will support raising the rate of corporation tax, the reality is that it’s the right thing to do.
He said: “Corporation tax is a tax on profits, not turnover, so it is only a tax on businesses that are thriving. Businesses have had a lot of support over the last year and there have been more winners than perhaps some people realise.
“Even after the raise, the UK’s rate of tax cannot be considered high on a global scale, and this change is also one of the simplest to implement, so avoids creating confusion or uncertainty elsewhere.”
Premier Miton Investors UK Growth fund manager Jon Hudson said: “The main negative for shareholders of UK companies is the rise in corporation tax to 25% from 2023, as a smaller share of company profits will belong to shareholders.”
‘Super deduction’: a surprise of significant benefit
The government also announced an upfront capital allowances “super-deduction” for businesses which enables them to offset 130% of the cost of new equipment against tax for two years.
The budget document said: “This upfront super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest, ensuring the UK capital allowances regime is amongst the world’s most competitive. Investing companies will also benefit from a 50% first-year allowance for qualifying special rate (including long life) assets.”
JP Morgan Asset Management chief market strategist EMEA Karen Ward said: “The super deduction on investment aims to tackle the UK’s chronic underperformance of business investment relative to its international peers in the past five years.
“Real UK business investment has fallen 10% since the Brexit referendum which contrasts to a rise of 14% in both the US and France. Historically incentives haven’t had much impact on spurring spending since the outlook for demand tends to be the primary driver. But if demand does recover strongly it may tip the balance for some firms.”
Quilter Investors portfolio manager Hinesh Patel said: “Tax hikes are on the horizon, most notably for businesses with a big jump in corporation tax to 25% in 2023/24, but with a useful tapering feature and with a super-deduction on investments that could reduce certain companies’ tax bills by 130%.
“Overall, the chancellor’s aim is to spend now, and increase the tax take through inflation during the recovery, and then build back the economy through business investment tomorrow.”
