The U.K. will introduce a new tax break for businesses that invest in the country, as it announced a hike in corporate tax rates to 25% of profits from 2023, in plans set out on Wednesday as part of an annual budget.
Finance minister Rishi Sunak pledged to use the “full measures of our fiscal firepower” to save jobs and businesses in the budget aimed at tackling the devastating impact of the COVID-19 pandemic on the economy.
The U.K.’s Office for Budget Responsibility (OBR), which advises the government, said it now expects the U.K. economy to return to pre-COVID levels in the middle of 2022 — six months earlier than its November forecast. The OBR forecasts the U.K. economy to grow 4% this year, before expanding 7.3% in 2022 — the highest annual gross domestic product growth since 1941.
However, Chancellor of the Exchequer Sunak warned the U.K. was at a “moment of crisis,” as he gave an update on the country’s finances and pledged billions more to support those most affected by the pandemic but also signaled some tax hikes to fix the finances.
Sunak announced plans to:
- Hike corporate tax rates from 19% to 25% by 2023 for companies with profits over £250,000 ($349,000).
- Extend the jobs furlough program that supports workers hit by the pandemic.
- Introduce a new tax break for businesses that invest in the country in the next two years.
- Extend the stamp duty holiday to Jun. 30.
- Create a new infrastructure bank.
- Bring £5 billion of additional grants to help pandemic-hit businesses.
- Relax London listing rules.
“Taking into account the significant support announced at Spending Review 2020, this means our total COVID support package, this year and next, is £352 billion,” Sunak said, adding that measures announced last year took the total to £407 billion.
Forecasts show the government is expected to borrow £234 billion next year, but Sunak said “we cannot allow debt to keep rising,” setting out two initial measures to bring borrowing down.
Sunak announced plans to raise corporate taxes to 25% of profits in April 2023, up from the current rate of 19%. There would then be a taper for firms earning above £50,000, with those earning more than £250,000 being taxed at the maximum 25%. Smaller companies earning less than £50,000 will be exempt from the increase and remain at the 19% rate.
The tax rise will affect any global company which makes profit in the country, including technology giants such as Facebook
and Google parent Alphabet
and the likes of coffee-shop chain Starbucks
and online retailer Amazon
“Moving corporation tax to 25% in one leap will cause a sharp intake of breath for many businesses and sends a worrying signal to those planning to invest in the U.K.,” said Tony Danker, director general of industry trade body the Confederation of British Industry.
The government will also freeze personal tax thresholds (the amount of tax-free earnings people receive) from next year until April 2026. The question of whether or not to raise personal taxes was closely watched in the run-up to the budget, with former prime minister David Cameron urging the chancellor to hold off on tax hikes.
“This government is not going to raise the rates of income tax, national insurance or VAT. Instead our first step is to freeze personal tax thresholds,” Sunak told Parliament on Wednesday.
To encourage companies to invest in the U.K. as it recovers from the pandemic, Sunak set out plans for a “Super Deduction” that will allow them to cut their tax bill. For the next two years, when companies invest they can reduce their tax bill by 130% of the cost of that investment.
David Owen, chief European economist at Jefferies, said: “Pre-announced rise in corporation tax to 25% will make headlines — but super allowance for business investment is interesting — especially with £100 billion of excess cash sitting on the corporate balance sheet (since pre-COVID levels).”
The raft of measures Sunak announced in the 2021 budget included extending the furlough program until the end of September. Under the program, the government pays up to 80% of a worker’s salary for hours not worked due to the pandemic. In July, employers will have to contribute 10% as government support dips to 70%, and in August and September government contributions will fall to 60% as employers’ support rises to 20%. As of the end of January, 4.7 million workers were furloughed.
In addition to an extension of a stamp duty holiday — stamp duty is a property tax on house buyers — until the end of June, the budget will support increasing the accessibility of homeownership through a new mortgage guarantee plan that will lower deposits to 5%. The chancellor said that lenders HSBC
will start offering 95% mortgages in April.
The budget also supports Prime Minister Boris Johnson’s ambitious plan for a “green industrial revolution” through a massive investment in infrastructure for a green transition, including building new port infrastructure for offshore wind energy projects. The £40 billion investment will begin with an initial capitalization of £12 billion in the spring.