What is corporation tax? Rates explained, how to make payments - why a cut has been announced in mini budget

Chancellor of the Exchequer Kwasi Kwarteng has reversed Rishi Sunak’s planned April 2023 hike in the business tax

The Chancellor of the Exchequer Kwasi Kwarteng has announced tax cuts and outlined the government’s spending plans in a mini budget delivered to the House of Commons today (23 September).

Liz Truss’s new government has sought to tackle the cost of living crisis and stave off a UK recession through a policy of trickle down economics. The Prime Minister and her Chancellor believe the country will become more prosperous if the UK economy is in strong growth.

In a bid to achieve this economic agenda, Kwasi Kwarteng has announced he will slash his predecessor’s planned hike to corporation tax. The policy is likely to be popular on the right-wing of the Conservative Party.

But what exactly is this tax, what did Kwasi Kwarteng say about it - and what will the reversal of it mean? Here’s what you need to know.

Corporation tax is a major source of money for the Treasury but Conservatives argue it harms the UK’s attractiveness to businesses (image: AFP/Getty Images)

What is corporation tax?

Corporation tax is a tax on some of the profits businesses make. All limited businesses in the UK have to pay it, and it is calculated in a similar way to the income tax we pay as individual workers.

Some members clubs, societies and associations, as well as co-operatives, also have to pay it. It is paid through a company tax return form known as CT600 that has to be sent - profits or not profits - to HMRC once every year.

Currently, the corporation tax rate is set at 19% in the UK.

Most countries have some form of corporation tax, but some territories - like Guernsey, the Isle of Man and the Cayman Islands - do not have any. This is why some multinational companies choose to headquarter themselves in these places, or divert their profits through them.

For this reason, right-leaning politicians tend to argue the tax should be set at a low level to attract businesses, which is part of the reason why it has been reduced by successive Tory Chancellors from a rate of 28% over the past decade.

But according to think tank the Institute for Public Policy Research (IPPR), UK business investment was the lowest out of the G7 group of nations in 2019 despite the country having had the lowest rate of corporation tax for two decades. It also ranked 28th out of 31 members of the Organisation for Economic Co-operation and Development (OECD) - a group of the world’s wealthiest nations.

Businesses will no longer have to face a 25% rate of corporation tax (image: Adobe)

According to the independent Office for Budget Responsibility, the tax is also a major source of revenue for the Treasury, generating £50 billion in the 2021/22 tax year.

The UK’s current rate sits well below the global average of 23.6% and the average in the Americas (27.16%), although it is on a par with the European average (18.98%). Near-neighbours like Ireland (12.5%) and Hungary (9%) have rates that are much lower.

What was corporation tax rise?

Corporation tax had been set to rise for the first time since 1974 in April 2023. During his Covid budget in Spring 2021, the former Chancellor Rishi Sunak said the headline rate would rise to 25% for company profits over £250,000.

Firms whose profits are under £50,000 were going to have to pay a ‘small profits rate’ of 19%.

Rishi Sunak has warned Liz Truss’ economic plans could make inflation worse (image: Getty Images)

Mr Sunak said at the time that it was “fair and necessary to ask [businesses] to contribute to our recovery” from the Covid pandemic. The rise was justified, he said, because there was public spending of more than £100 billion on emergency support for firms during the various lockdowns.

The tax hike was set to raise an additional £47.8 billion for the public purse by April 2026, according to government estimates.

What is Kwasi Kwarteng’s corporation tax cut?

Rishi Sunak’s planned increase to corporation tax was scrapped by Kwasi Kwarteng in his mini budget on Friday (23 September). The new Chancellor told MPs the rate would remain at 19%.

“The interests of businesses are not separate from the interest of individuals and families,” Mr Kwarteng told the House of Commons.

“In fact, it is businesses that employ most people in this country. It is businesses that invest in the products and services we rely on.”

Kwasi Kwarteng wants to encourage business investment in the UK (image: Getty Images)

He added: “We will have the lowest rate of corporation tax in the G20. This will plough almost £19 billion a year back into the economy. That’s £19 billion for businesses to reinvest, create jobs, raise wages, or pay the dividends that support our pensions.”

Labour’s shadow chancellor Rachel Reeves said this move, and the others announced in the mini budget, were: “Based on an outdated ideology that says if we simply reward those who are already wealthy, the whole of society will benefit. They have decided to replace levelling up with trickle down.

“As President Biden said this week, he is is sick and tired of trickle-down economics. And he is right to be. It is discredited, it is inadequate and it will not unleash the wave of investment that we need.”