What is corporation tax UK? HMRC rates explained - and how Jeremy Hunt statement has impacted business tax

The new Chancellor of the Exchequer Jeremy Hunt has announced a major reversal of Liz Truss and Kwasi Kwarteng’s tax cutting agenda today (17 October). The announcement comes just weeks after Kwarteng revealed a mini budget that created chaos on currency markets, nearly crashed pension funds and led to mortgage rate hikes.

Hunt’s statement, which has been delivered amid speculation about Truss’s future as Prime Minister, saw the cancellation of some of her headline policies as the government attempts to regain economic credibility. These included plans to cut income tax, scrap VAT for overseas visitors to the UK, and freeze alcohol duty. Hunt has also scaled back the PM’s energy price guarantee.

Other plans, including a cut to stamp duty and a reversal of former Chancellor Rishi Sunak’s national insurance increase, will remain in place. Jeremy Hunt is expected to set out public spending cuts as well as longer-term tax and spend plans on Halloween.

One of the biggest announcements made during the mini budget was a plan to scrap a planned hike in corporation tax. During Boris Johnson’s time in office, Sunak had planned to raise the rate of the business tax from 19% to 25%. But is this rise now going ahead - and how does the tax work? Here’s what you need to know.

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.

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%.

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 were Kwasi Kwarteng’s corporation tax plans?

Rishi Sunak’s planned increase to corporation tax was scrapped by Kwasi Kwarteng in his mini budget on 23 September. The then-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.”

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.”

In a press conference on Friday (14 October) held just hours after Kwasi Kwarteng had been sacked, Liz Truss said she would reverse the scrapping of the corporation tax rise.

What did Jeremy Hunt say about corporation tax?

Given Liz Truss had already announced a u-turn on her corporation tax plans, it was no great surprise to hear Jeremy Hunt confirm the move in his address to the public on Monday (17 October). The Chancellor said that while he and Truss were “both committed to cutting corporation tax”, the government needed to provide “certainty about the sustainability of public finances” to calm the markets.