Corporation tax rates increase in the 2021 Budget in the UK

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Corporation Tax Rates

Budget announcements are supposed to be one of the most anticipated declarations for all UK residents. The term budget resonates across the nation where people look forward to the amendments in the financial realm, particularly the tax levy.

March 2021 has finally brought forth the much-awaited budget declarations from the UK government. On Wednesday, 3 March 2021, British Chancellor of the Exchequer, Rishi Sunak has announced the 2021 Budget.

After being postponed from the Autumn session in October 2020 due to the COVID-19 turmoil, people had high hopes for the coming budget declaration. In the Budget statement, Chancellor Sunak states various revisions that will come into effect within the next few years. He has come up with some radical changes in the corporate tax domain.

These corporation tax alterations are making big fuzz in the UK economy. This announcement looking at the financial woes of the common public may seem a bit unwelcomed.

Initor Global UK is here to throw some light on the critical aspects related to the corporation tax surge with the present Budget 2021.

A brief on Corporation Tax applicable to UK businesses

Corporation tax is a form of corporate tax applicable to the profits of companies that are registered in the UK.

The companies liable to pay corporation tax include entities that hold registration abroad but have a permanent establishment in the United Kingdom.

Expected Impact of the Corporation Tax Rates Increase on the Government Revenue

Presently the country’s economic situation is still in crisis. Hence, the Chancellor is looking to initiate measures to boost the recovery efforts.

With the recent Budget, the UK government intends to increase the corporation tax to 25% in April 2023, a 6% increase from the current tax.

This current Budget has been presented against the backdrop of nationwide lockdown and spiraling national debt. One of the government’s major motives is to put into motion effective steps that will reinstate the public finances that are distorted due to COVID 19 pandemic.

No wonder the decision to raise the corporation tax percentages is a move in the same direction.

The effect of the increase will not be visible immediately in the coming year. The corporation tax surge is expected to raise £22bn in revenue a year, with the tax take increasing from £48.8bn in 2022-23 to £71.3bn in 2023-24.

Before this Budget, over the past year, Mr. Sunak has declared several alleviating measures worth over £280 billion to support the economy. It has led to a drain in the treasury of the nation.

The economic growth has dipped around 10 percent, one of the largest falls in the last 300 years. Presently, even the Budget announced has a deficit that tops approximately £270 billion.

Yet, many are looking at the spike as a contradiction to the proposed corporate tax reductions in the previous Budget announcements. The government seems to defer from its commitment in the last 2020 budget to maintain the Corporation tax rate at 19 percent for the next few years.

Analyzing the repercussions of the Corporation Tax Rates Rise on different business segments

As the pandemic fire is not yet over in the UK and the manufacturing units, including small-scale and large-scale industries, are still recovering from the lockdown, these tax changes are making big headlines. Besides, Brexit has also affected the industrial sector significantly.

In light of such a scenario, Brits may look at the future increase as an unwelcome move by many corporations. However, the spike in the corporation tax will not come to effect until 1 April 2023. The UK government has given time for the industrial sectors to start a recovery during the time gap.

Concessions for small businesses

The Budget has considered the recovery of small-business matters as a crucial element, and the Chancellor has granted certain concessions to the small-scale business in it.

Sunak said that he is protecting small businesses with a profit rate that is £50,000 ($69,816) or less than this limit, can continue to pay the current rate that is 19%.The Chancellor has stated in the House of Commons that companies with Small Profit Rates, which means around 70% of the total companies­ in the UK, will remain unaffected by the rise. There shall be more than 1.4 million such companies in Great Britain.

When the companies’ income exceeds their annual profits of more than £250,000, companies are expected to pay corporation tax. Thus, any sorts of concessions are not allocated to companies that have profits above £250,000. If the company has earnings between £50,000 and £250,000, they can claim marginal relief to deliver a gradual intensification in the effective Corporation Tax rate.

One must also note the fact that the amended rates will come into effect after the Office for Budget Responsibility (OBR), a public body that provides independent predictions, declares that the restoration of the economy has been carried out identical to bring it at par with the pre-pandemic times.

As per present estimations, the UK shall attain the pre-COVID-19 economic growth pace by mid-2022.

Effect of Corporation tax rates on Banks

The government has enacted the 25% corporation rate coupled with an 8 percent bank surcharge. However, this seems to have demotivated the banks across Britain. Thus, the government is planning to conduct a review of the surcharge. It will set out to publish it by autumn.

This will ensure that the joined rate of bank’s profits will not experience a dramatic increase than the present level. Arguably, the banking sector has done relatively well from this Budget is being spared a share of the pain suffered by other large companies, which is a change from previous Budgets’ general policy since the financial crisis.

Understanding the Other Factors behind the Corporation Tax Rate Hike

The UK government has also highlighted the fact that the corporate tax alterations are designed to raise not just their revenue. It will help shape an internationally competitive tax system.

Current Tax Rates in Other Nations

Currently, the corporation tax rate in the UK (at 19 percent) is the lowest in the G7 countries. It also counts among the least tax levies in the list of G20 nations if we consider the increased rate of 25 percent.

There are countries like the USA that are also contemplating an increase in corporate taxes. Thus, the UK is not the only one of the major economic powers to introduce such an escalation in taxes.

Relief initiatives for suffered companies from pandemic

Another noteworthy aspect is that the finance ministry is also considering introducing another set of relief initiatives. These reliefs will enable companies who have suffered significant blows during the pandemic era to lower their taxable profits.
Whilst, the companies which have managed to sustain their revenue stream can pay. Hence, they shall comply with the increased corporation tax rates.

Corporate entities can also use the cumulative losses incurred in the last year, especially due to the pandemic. So they can protect their income from the increased corporation tax levy.

Stay on top of the latest accounting and tax updates with expert assistance from Initor Global UK!

Initor Global UK is one of the paramount accounting and tax outsourcing companies serving firms in the UK. Many CA practices and accounting firms for more than a decade.

Our tax and accounting veterans have carved an impressive reputation in the outsourcing industry with their service skills. Initor not just retains a vibrant team of tax and accounting experts. We also have a world-class technology infrastructure to cater to your firm’s different demands. Contact our team for more details.

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