Corporate tax reform

What is corporation tax?

Corporation tax is charged on the profits made by companies, public corporations and unincorporated associations such as industrial and provident societies, clubs and trade associations.

The tax is often termed ‘onshore corporation tax’ as a separate corporation tax regime applies to the exploration and extraction of oil and gas from the UK and UK Continental Shelf.

In recent years corporation tax has been charged at a single flat rate. This was set at 19% for the tax years 2017 to 2022. Since 2023 there has been a main rate set at 25% and a small companies rate set at 19%.

How much does corporation tax raise?

Corporation tax (CT) raised £79.7 billion in 2022/23. It is the fourth largest contributor to government tax revenues after income tax, National Insurance contributions (NICs) and VAT. Nearly all corporation tax receipts are accounted for by onshore CT, which raised £73.9 billion in 2022/23.

Onshore CT receipts have risen as a share of GDP since 2011/12, although they fell in 2019/20 with the impact of the Covid-19 pandemic. The Office for Budget Responsibility (OBR) note that this upward trend was driven by a rising tax base as well as a rising effective tax rate. The tax base reflects strong growth in commercial and industrial company profits from the depressed level they reached in the 2007/08 recession. The upward trend in CT receipts is notable as the headline rate of CT was successively cut from 28 per cent in 2010/11 to 20 per cent in 2015/16 and cut again to 19 per cent in 2017/18.

Spring Budget 2021: a new 25% main rate and 19% small profits rate

In the Spring 2021 Budget the then Chancellor, Rishi Sunak, announced a major reform to the corporate tax regime:

• an increase in the rate of tax from 19% to 25% to apply to companies with profits over £250,000, from April 2023.
• the introduction of a separate rate for companies with profits under £50,000, set at 19%, with a tapered rate to apply for businesses with profits above this threshold but under £250,000.
• a new ‘super-deduction’ to allow companies to claim a 130% first-year capital allowance for investment in qualifying new plant and machinery assets, to apply from 1 April 2021 until 31 March 2023, and a 50% first-year allowance for qualifying special rate assets.
• a temporary two-year extension in ‘loss carry-back’ which allows companies to offset losses in the current year against taxable profits in the past year, from one year to three years.

The scale of these reforms was considerable. At the time it was forecast that the two reforms to capital allowances would cost £12.3 billion in 2021/22, rising to £12.7 billion the following year. In turn the new rates of corporation tax were forecast to raise £11.9 billion in 2023/24, rising to £17.2 billion in 2025/26.

On 23 September 2022, as part of the Government’s Growth Plan, the then Chancellor Kwasi Kwarteng announced the increase in the main CT rate to 25% would be cancelled. The following month Jeremy Hunt was appointed Chancellor and reversed this decision, announcing that the CT rate rise would go ahead as previously planned from 6 April 2023.

Spring Budget 2023: full expensing

In the Spring Budget 2023 Chancellor Jeremy Hunt, confirmed the Government would proceed with setting the main rate of CT at 25%, and introducing a small profits rate at 19% from 1 April 2023, as well as ending the super-deduction.

The Chancellor went on to announce a major reform to the system of capital allowances, to enable companies to claim the full cost of their expenditure on IT equipment, plant or machinery against tax when this business investment was made. This approach to the tax treatment of business investment - ‘full expensing’ – would apply for three years: for expenditure incurred on or after 1 April 2023 but before 1 April 2026. A 50% first-year allowance would apply to investment in special rate assets. At the time this measure was forecast to cost £7.96 billion in 2023/24, rising to £10.66 billion in 2024/25.

Annual Investment Allowance

In January 2019 the Annual Investment Allowance (AIA) - which allows business to fully offset expenditure in plant and machinery up to a set annual limit – was increased from £200,000 to £1 million. In the Autumn Budget 2021 the then Chancellor Rishi Sunak announced the AIA would be fixed at £1 million until 31 March 2023. As part of the Government’s Growth Plan the then Chancellor Kwasi Kwarteng proposed that the AIA be set at £1 million permanently. In the Autumn Statement 2022 Mr Hunt announced that this was one of the tax measures in the Growth Plan that would be retained – a decision he confirmed at the time of the Spring Budget 2023. This was forecast to cost £1.12 billion in 2023/24, rising to £1.69 billion in 2024/25.

Autumn Statement 2023: making full expensing permanent

In the 2023 Autumn Statement Chancellor Jeremy Hunt announced that the Government would make full expensing permanent. This is forecast to cost the public finances £10.9 billion by 2028/29. The OBR estimated that of this cost, £9.2 billion derives from the ‘static costing’ – that is, the impact of a more generous tax treatment for pre-planned investment. The provision of permanent full expensing for the additional investment that the OBR expect to be made as a consequence of this change adds a further £1.8 billion to the total cost.

In its Economic and Fiscal Outlook published alongside the Autumn Statement the OBR revised its estimates of the cost of previous corporate tax reforms, partly reflecting its downward revision of how much these measures would generate new investment. The two-year super deduction is now forecast to cost £6.2 billion a year, which represents about half the initial estimate. Temporary full expensing is forecast to cost, on average, £8.3 billion a year.

The Chancellor presented the Spring Budget 2024 on 6 March 2024. The Budget did not include any major reforms to corporation tax. The main rate and the small profits rate are unchanged for 2024/25, at 25% and 19% respectively.

Further reading

This briefing paper discusses the details of the package of corporate tax measures announced in the Spring 2021 Budget, before looking at the further reforms announced in the Spring 2023 Budget, Autumn Statement 2023, and the Spring 2024 Budget.

A second Commons Library briefing provides a history of reforms made to the corporate tax regime