The UK government has announced significant changes to corporation tax rates as part of the Labour Party's first budget in nearly 15 years. The new measures, presented by Finance Minister Rachel Reeves, aim to address the fiscal challenges facing the country while promoting economic growth and investment.
Key Takeaways
Corporation tax rates will rise to 25% for businesses with profits over £250,000 from April 2023.
Smaller businesses with profits up to £50,000 will continue to pay a lower rate of 19%.
The government aims to eliminate the budget deficit by 2029/30, with a commitment to balanced budgets thereafter.
New fiscal rules will allow increased borrowing for infrastructure investment.
Overview of Changes
Starting from April 2023, the basic corporation tax rate in the UK will increase from 19% to 25% for companies reporting profits exceeding £250,000. This change is part of a broader strategy to enhance government revenues and support public services.
For smaller businesses, the previous rate of 19% will remain applicable for profits up to £50,000. Companies with profits between £50,001 and £250,000 will benefit from a marginal relief rate of 26.5%, which gradually increases their tax burden as profits rise.
Implications for Businesses
The increase in corporation tax rates is expected to generate an additional £25 billion annually by the end of the decade. However, this could also impact wages and hiring practices, as businesses may face higher costs.
Social Security Contributions: From April, social security contributions for businesses will rise by 1.2 percentage points to 15%, further increasing operational costs.
Threshold Changes: The threshold for paying social contributions will be lowered from £9,100 to £5,000, affecting more businesses.
Taxation on High Earners
The budget also includes measures targeting high earners and wealthy individuals. Key changes include:
A freeze on the inheritance tax threshold until 2030, with plans to include inherited pensions in the tax from 2027.
An increase in capital gains tax rates, rising to 18% for lower earners and 24% for higher earners, expected to raise £2.5 billion annually by 2030.
Economic Growth Projections
The Office for Budget Responsibility (OBR) forecasts modest economic growth, with an expected increase of 2.0% in 2025. However, growth rates are projected to decline in subsequent years, highlighting the ongoing economic challenges.
Government Spending Plans
The Labour government has committed to significant increases in public spending, including:
An additional £22.6 billion for the state-run health service.
£100 billion in capital spending over the next five years, focusing on infrastructure and education.
A pledge of £2.9 billion for the armed forces and continued support for Ukraine.
Conclusion
The changes to corporation tax rates and the broader fiscal strategy reflect the Labour government's commitment to addressing the UK's economic challenges while promoting growth and investment. As businesses prepare for these changes, the impact on hiring, wages, and overall economic activity will be closely monitored in the coming years.
Sources
Budget 2024: Key points in UK Labour's tax-and-spend plan | Reuters, Reuters.
Changes to UK corporation tax rates from 1 April 2023 | Rödl & Partner, Roedl.com.
Taxing carried interest in the UK: the new regime announced in the Labour government’s Autumn Budget 2024 | Tax Talks, Tax Talks.
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