UK Corporation Tax Rise Explained

This post may contain affiliate links. If you make a purchase through these links, we may earn a commission at no additional cost to you.

Imagine your favourite high-street shop, say, a big coffee chain. You pop in for a latte, and it costs you £3. But what if the government decided that this huge company, which makes billions a year, should pay more tax? Suddenly, that simple cup of coffee is at the centre of a massive debate. Would the price shoot up? Would the company decide to close some shops, maybe even the one on your corner? Or would that extra tax money go towards fixing potholes on your street or helping your local hospital?

This is the big, complicated, and often fiery question of corporate tax. It’s a subject that gets politicians shouting, newspapers writing dramatic headlines, and ordinary people wondering what it all means for their wallets. For decades, the UK has been in a tug-of-war over this. Some say taxing big businesses more is the only fair way to fund the public services we all rely on, like the NHS, schools, and roads. They argue that these massive firms, from tech giants to international banks, make huge profits from operating in Britain and should contribute a bigger slice of the pie.

Others warn that hiking taxes on these companies is like shooting ourselves in the foot. They claim it will scare businesses away, sending them packing to countries with lower taxes, like Ireland or Switzerland. If that happens, they say, we lose jobs, investment, and the very money we were trying to collect. It’s a balancing act, and getting it wrong could have huge consequences for everyone, from the barista serving your coffee to the government trying to balance its books.

In this guide, we’re going to untangle this knotty issue. We’ll look at what corporation tax actually is, how it has changed over the years in the UK, and explore the real-world effects when the government turns the tax dial up or down. We’ll examine the arguments from all sides, look at what’s happened in other countries, and figure out what it all means for you, your job, and your community. So, grab a cuppa, and let’s dive in.

What Exactly is Corporation Tax?

Before we get into the heated debates, let’s get the basics straight. What are we actually talking about when we say “corporation tax”?

Think of it like income tax, but for companies instead of people. When you get your payslip, you see that a chunk of your earnings has been taken off for the government. Companies have to do the same. At the end of the year, a company adds up all its income and subtracts all its costs – things like staff wages, rent for its offices, electricity bills, and the cost of materials. What’s left over is its profit.

Corporation tax is a tax on that profit.

It’s not a tax on the total amount of money a company makes (its revenue), but only on the profit it declares. So, if a giant supermarket chain makes £50 billion in sales but spends £49 billion on running its stores and paying its staff, it only pays tax on the remaining £1 billion of profit.

In the UK, this tax is a crucial source of income for the government. In the 2023-24 tax year, it was forecast to bring in around £85 billion. That’s a huge amount of money that goes into the national pot to pay for everything from pensions and police officers to motorways and museums.

How Does it Work in Practice?

It’s not quite as simple as just calculating the profit and sending a cheque to His Majesty’s Revenue and Customs (HMRC). Companies can use a whole host of rules and allowances to reduce the amount of profit they have to pay tax on.

For example, if a company invests in new machinery or builds a new factory, it can often deduct the cost of that investment from its profits. This is called capital allowance, and it’s designed to encourage businesses to spend money on things that will help them grow and create jobs.

Companies can also get tax relief for spending on research and development (R&D). If a pharmaceutical company is trying to invent a new medicine, or a tech firm is building a new piece of software, the government lets them reduce their tax bill to reward that innovation.

This is where things get complicated. These allowances and reliefs mean that the headline rate of corporation tax—the main percentage announced by the Chancellor—isn’t what most big companies actually pay. A company might be in a country with a 25% tax rate, but after all the deductions, its effective tax rate might be much lower, perhaps only 15% or 20%. This is a key reason why you often hear stories about massive global companies making billions in profit but paying very little tax in the UK.

A Quick Trip Through Britain’s Corporate Tax History

To understand where we are now, it helps to know where we’ve come from. The UK’s attitude to taxing big business has swung back and forth over the years, often reflecting the political ideas of the time.

The Post-War Years: High Taxes for a Big State

After the Second World War, Britain was focused on rebuilding the country and creating the welfare state, including our beloved NHS. To pay for all this, taxes were high across the board, and corporation tax was no exception. In the 1950s and 60s, the main rate hovered at 40% or even higher. The general thinking was that companies benefiting from a stable, educated, and healthy society should contribute heavily to maintaining it.

The Thatcher Revolution: Slashing Taxes to Boost Business

Everything changed in the 1980s with the arrival of Margaret Thatcher. Her government believed that high taxes were strangling the economy. The theory, often called “supply-side economics,” was that if you cut taxes on companies, they would have more money to invest, expand, and hire more people. This, in turn, would lead to more economic growth, and the government would end up collecting more tax revenue overall, even at a lower rate.

True to this belief, her government began a long process of cutting corporation tax. By the time she left office in 1990, the main rate had been slashed to 34%.

New Labour and the Race to be Competitive

The trend continued under both Conservative and New Labour governments. In the 1990s and 2000s, a new idea took hold: globalisation. Companies were no longer just operating in one country; they could move their headquarters, factories, and money around the world with the click of a button.

This sparked a “race to the bottom” on tax. Governments across the world, including in the UK, started competing to offer the lowest corporation tax rates. The fear was that if Britain’s taxes were too high, big international firms would simply pack up and move to Ireland, which famously offered a rock-bottom rate of 12.5%.

Under Chancellors Gordon Brown and George Osborne, the UK’s corporation tax rate continued to fall. By 2017, it had reached a historic low of just 19%. For a while, Britain had one of the lowest rates of any major developed economy. The goal was to send a clear message to the world: “The UK is open for business.”

The Tide Turns: A New Era of Higher Taxes?

Recently, however, the mood has started to shift again. After years of austerity following the 2008 financial crisis, and with the massive costs of the COVID-19 pandemic and the energy crisis, the government found itself needing more money.

In 2023, the government took a huge step and raised the main rate of corporation tax from 19% all the way up to 25% for companies with profits over £250,000. It was the first time the rate had been increased in decades.

The thinking behind this was twofold. First, there was a simple need for cash. But second, there was a growing feeling, both in the UK and internationally, that the “race to the bottom” had gone too far. Global giants like Amazon and Google were facing public anger for making vast profits while paying seemingly tiny amounts of tax. An international agreement, led by the OECD (a club of rich countries), was forged to introduce a global minimum tax rate of 15% to stop companies from shifting their profits to tax havens.

This brings us to today, a moment where the long-held belief that “lower tax is always better” is being seriously questioned.

The Big Debate: Arguments For and Against Raising Corporate Taxes

When a Chancellor stands up and announces a rise in corporation tax, it sets off a huge debate. On one side, you have people who say it’s a fair and necessary way to fund public services. On the other, you have those who warn of economic doom. Let’s break down the main arguments.

The Case FOR Higher Taxes on Big Companies

1. Funding Public Services

This is the most straightforward argument. The government needs money to pay for hospitals, schools, police, defence, and pensions. Corporation tax is a major source of that money. Proponents argue that it is only fair that the largest, most profitable companies contribute a significant amount to the society that helps them succeed. They use our roads to transport goods, employ people educated by our schools, and rely on the stability provided by our laws and emergency services. Taxing their profits is simply asking them to pay their way. When the government raised the rate to 25% in 2023, it was estimated this would eventually bring in an extra £18 billion per year. That’s enough to hire hundreds of thousands of nurses or teachers.

2. Reducing Inequality

Many see higher corporation tax as a tool for tackling inequality. The profits of big companies ultimately flow to their owners, the shareholders. These shareholders are often wealthy individuals or large investment funds. When companies pay less tax, more profit is available to be paid out as dividends to these shareholders, making the rich richer. By taxing profits at a higher rate, the government can redistribute that money through public spending or welfare benefits, helping to create a fairer society.

3. It’s a More Progressive Tax

Compared to other taxes, corporation tax is seen as progressive. That means it takes a larger proportion of money from those who can most afford to pay. A tax like VAT (Value Added Tax), on the other hand, is regressive. It’s a flat 20% on most goods and services, so it takes a bigger bite out of the budget of a low-income family than a wealthy one. Taxing corporate profits is seen as a way to raise money without hitting the poorest households the hardest.

4. Levelling the Playing Field for Small Businesses

Your local independent bookshop or café has to compete with giants like Amazon and Starbucks. These small businesses don’t have armies of accountants and lawyers to find clever ways to reduce their tax bills. They usually pay the full tax rate on their profits. When multinational corporations use complex schemes to pay very little tax, it puts smaller, local businesses at a huge disadvantage. Higher and better-enforced corporation tax, proponents argue, helps to level the playing field and gives small British businesses a fairer shot.

The Case AGAINST Higher Taxes on Big Companies

1. It Scares Away Investment

This is the number one argument against raising corporation tax. In a globalised world, big companies can choose where to invest their money. If the UK’s tax rate is significantly higher than other countries, a company might decide to build its new car factory in France or its new research centre in Germany instead. This means the UK loses out on new jobs and the economic boost that comes with that investment. Business groups like the Confederation of British Industry (CBI) often warn that unpredictable or high taxes create an unstable environment that makes companies nervous about committing money to the UK for the long term.

2. Companies Don’t Really Pay the Tax – People Do

This is a crucial and often misunderstood point. A company is just a legal entity; it’s a piece of paper. It can’t “pay” tax in the way a person can. The money has to come from somewhere, and economists argue it comes from one of three places:

Higher Prices for Customers: The company might simply pass the cost of the tax on to its customers. That £3 latte could become £3.10. So, in effect, the tax is paid by ordinary consumers.
Lower Wages for Workers: The company might decide it has less money available for pay rises or might even look to cut jobs to save costs. In this case, the workers are the ones who bear the burden.
Lower Returns for Shareholders: The company pays smaller dividends to its owners. This might not seem like a problem for most of us, but millions of ordinary people have their pension savings invested in these big companies through pension funds. If the companies they own make less profit after tax, the value of their pension pot grows more slowly.

The debate among economists is about how this burden is shared. Some studies suggest workers bear the brunt through lower wages, while others point more to shareholders. But almost all agree that the tax doesn’t just vanish from the company’s bank account; it has real-world consequences for people.

3. It Can Lead to Lower Tax Revenue Overall

This sounds strange, but it’s a famous economic theory known as the Laffer Curve. The idea is that if you set the tax rate at 0%, the government gets no money. If you set it at 100%, nobody would bother to make a profit, so the government would also get no money. Somewhere in between, there is an optimal tax rate that brings in the maximum amount of revenue.

The argument is that if you raise corporation tax too high, you might actually get less money. This could be because:

Companies invest less, so there are fewer profits to tax in the first place.
Companies move their headquarters or operations to lower-tax countries.
Companies spend more money on clever accountants to find legal loopholes to avoid the tax.

Critics of the 2023 tax rise warned that the UK was moving to the wrong side of the Laffer Curve and that the government’s predictions of extra revenue might not materialise.

4. The UK Becomes Less Competitive

In the race for global investment, a low corporation tax rate is a simple and powerful advert. When George Osborne cut the rate to 19%, he was trying to signal that the UK was one of the most business-friendly places in the world. Raising it to 25% puts the UK’s rate higher than the average for developed countries and significantly higher than our neighbour, Ireland (12.5%). Opponents worry this makes Britain a less attractive place to start and grow a business, especially after the economic uncertainty of Brexit.

The Real-World Impact: What Does the Evidence Say?

So, we’ve heard the theories. But what happens when the tyres hit the road? Let’s look at the evidence from the UK and around the world.

The Impact on Investment

This is the big one. Do tax rises really kill investment? The evidence is messy and hotly debated.

When the UK government announced the rise to 25%, it also introduced a major new investment incentive called “full expensing.” This allows companies to deduct 100% of the cost of new equipment from their profits in the year they buy it. It’s a very generous tax break designed to soften the blow of the higher headline rate.

The Office for Budget Responsibility (OBR), the UK’s independent economic forecaster, predicted that in the short term, the headline tax rise would reduce business investment. However, they believe that making “full expensing” permanent would offset this and ultimately boost investment in the long run.

Looking abroad, studies have shown a link between higher corporate taxes and lower investment, but the size of the effect varies. It seems to depend on many other factors, like the skills of the workforce, the quality of infrastructure, and the stability of the political system. A company won’t move to a war-torn country just because it has 0% corporation tax. Tax is just one piece of a much larger puzzle.

The Impact on Wages

Do workers pay for corporate tax rises through smaller pay packets? A famous study by the Institute for Fiscal Studies (IFS) looked at this question in the UK. They found that for every £1 extra raised from corporation tax, wages fell by about 44p. This suggests that workers do indeed bear a significant chunk of the burden.

However, other economists argue that in the real world, wages are determined by many things, including the power of trade unions, minimum wage laws, and the general demand for labour. They argue that well-paid, unionised workers in a profitable company are less likely to see their wages squeezed than low-paid, non-union workers in a struggling industry.

The Impact on Tax Avoidance

One of the biggest public frustrations is the sight of global tech and coffee companies making billions in UK sales but paying almost no UK corporation tax. They do this through complex but often legal accounting tricks, such as shifting their profits to low-tax jurisdictions like Bermuda or the Netherlands.

For example, a company might set up its headquarters in Ireland. The UK part of the business then pays a huge “licensing fee” to the Irish headquarters for using the company’s brand and technology. This fee wipes out most of the profit made in the UK, so there’s nothing left to tax. The profit magically reappears in Ireland, where it’s taxed at a much lower rate.

Does raising the headline tax rate encourage more of this? The evidence suggests it does. The bigger the gap between the UK’s rate and the rate in a tax haven, the greater the incentive for companies to spend money on accountants to move their profits around.

This is why the global minimum tax of 15% is so important. The idea is that if a company shifts its profits to a country with a 5% tax rate, its home country can then charge a “top-up” tax of 10% to bring the total up to the 15% minimum. This reduces the incentive for companies to use tax havens and could force them to pay more tax where they actually do business. The UK has signed up to this deal, and it’s a major new weapon in the fight against tax avoidance.

Case Study: Ireland’s Low-Tax Gamble

Ireland is the poster child for the low-tax model. In the 1990s, it slashed its corporation tax rate to just 12.5% when other countries were still up in the 30s and 40s. The result was a massive influx of investment from big American tech and pharmaceutical companies like Apple, Google, and Pfizer, who set up their European headquarters in Dublin. This flood of foreign investment was a key factor in transforming Ireland from one of Europe’s poorer countries into the “Celtic Tiger.”

However, Ireland’s model has faced criticism. Much of the “profit” recorded there is actually generated elsewhere and simply funnelled through the country to take advantage of the low tax rate. This has led to accusations that Ireland is acting as a tax haven and undermining the ability of other countries, including the UK, to collect their fair share of tax. The global minimum tax is a direct challenge to Ireland’s long-standing economic strategy.

So, What Does This All Mean for the UK’s Future?

The UK is at a crossroads. After decades of following the low-tax path, we’ve taken a sharp turn in the other direction. The decision to raise corporation tax to 25% was a huge gamble.

The government is betting that the extra revenue is desperately needed to fix public services and that the UK remains an attractive place to invest for other reasons, such as our world-class universities, skilled workforce, and the global hub of London. The “full expensing” scheme is their insurance policy, designed to keep businesses spending on new technology and infrastructure.

Critics, on the other hand, fear we are making a historic mistake. They worry that at a time of fragile economic growth and post-Brexit uncertainty, we are sending a signal to global business that the UK is no longer a low-tax, pro-business destination. They argue the tax rise will lead to less investment, fewer jobs, and may not even raise the money the government hopes for.

The Bigger Picture: Finding the Right Balance

Ultimately, there is no magic number for the perfect corporation tax rate. It’s a question of trade-offs. A higher rate might bring in more money for the NHS but could also make a car company decide to build its next electric vehicle plant in Slovakia instead of Sunderland. A lower rate might attract a new tech headquarters to London but leave less money for schools and social care.

The challenge for any government is to find the sweet spot: a rate that is high enough to fund the public services we all want, but low enough to keep the UK competitive in a globalised world. It’s a delicate balancing act, and the direction we choose will shape the British economy, our public services, and the lives of everyone in the country for years to come. The debate over that simple cup of coffee, it turns out, is about a whole lot more than just the price of a latte.

The Big Tax Question: What Really Happens When We Tax Big Companies More?