The headline rate of corporation tax will rise from 19 per cent to 25 per cent from 2023, Rishi Sunak has announced.
In a move that effectively reverses the policy of his predecessor George Osborne, the Chancellor said the rise was necessary to make public finances sustainable the long-term.
It comes as the government also moves to freeze the thresholds for income tax, inheritance tax, pensions allowance, capital gains tax, and VAT registration – another way of raising revenue.
The change to the tax on company profits still leaves the UK with the lowest rate of Corporation Tax in the G7, below countries like US, Germany, and Canada.
Mr Sunak said he wanted to reduce borrowing by raising more tax revenue rather than focus on cutting public spending because the Conservatives were the “party of public services”.
“The only other alternative would be to increase the rates of tax on working people, but I don’t think that would be right either,” he said.
Corporation tax receipts in 2018-19 were £55.1 billion, and £63.2 billion in 2019-20. It has been at 19 per cent since 2017; in 2010 when the Conservative-led coalition government took office the rate was 28 per cent, slightly above where it is now.
Mr Sunak said he would also create a Small Profits Rate of 19 per cent to ensure only businesses with profits of over £250,000 would be hit by the 25 per cent rate.
The chancellor also said he would introduce a new “super deduction”, tweaking tax allowances to encourage capital investment for the new two years.
But Paul Johnson, the director of the Institute for Fiscal Studies, said: “That’s a huge increase in rate of corporation tax. Right at top end of expectations. Extraordinary reversal of longstanding policy. Risky.”
On tax allowances, he said: “Raising income tax by freezing allowances is progressive, but it’s the least progressive way of raising income tax.”
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In the run-up to the Budget Labour said it would be “economically illiterate” to raise corporation taxes during the pandemic.
But responding to Mr Sunak’s speech, opposition leader Keir Starmer said it was right to delay any rise to 2023.
“Of course in the long run corporation tax should go up,” he said, adding that “no taxes should have been raised in the teeth of this economic crisis”.
Mel Stride, the Conservative MP who chairs the Treasury select committee described the policy as “quite a hike” but noted that the US was also planning to raise corporation tax rates, making the move “international competitive”.
“I think on balance it seems to me this is a reasonable move given that none of the possibilities are particularly palatable,” he said.
