As the Autumn Budget fast approaches, the government faces a stark dilemma: how can it raise revenue without stalling the country’s (admittedly fragile) economic recovery or undermining business confidence?
With limited political appetite for higher personal taxes (despite clear public pressure for a ‘wealth tax’), attention is now shifting once again toward the corporate sector. Rumours abound that Corporation Tax could rise from its current rate of 25% to possible highs of 28%.
To some, this may sound like a modest adjustment. However, in practical terms, it would likely prove to be a costly backward step for the UK’s global competitiveness.
Fiscal U-turns on tax: Why our competitiveness is on the line
Corporation Tax, which is charged solely on company profits, was cut steadily through the 2010s in a bid to radically encourage investment and garner interest from overseas businesses. The rate fell from 28% to 19% by 2017, which helped the UK build a reputation as one of the most competitive destinations in Europe for corporate activity.
However, you’ll know that this strategy faced a stark U-turn in recent years, having been reversed in 2023. At this time, the rate rose to 25% for larger firms. Having been originally billed as a temporary correction to stabilise public finances, it was never reduced to the lower levels experienced in the last decade. Now, with public debt still rising and other tax routes appearing too politically sensitive to be viable, the Treasury would appear ready to push it higher once more.
If true, this would drastically reduce our competitiveness further still and may materially deter foreign investment at precisely the moment we need it most.
Let’s be frank: in a global economy, tax policy sends some pretty strong signals. Ireland continues to hold its headline rate at 12.5%, while the European average remains closer to 21%. Even the United States, despite a year of fluctuating tariffs and increased international scrutiny, has discussed cuts to encourage the reshoring of manufacturing. Against that backdrop, a rise to 28% would place the UK firmly on the more expensive side of the ledger. Can we afford it?
For multinationals that are weighing up where best to locate future investment, tax stability matters almost as much as the rate itself. The UK’s frequent shifts in fiscal policy, from corporation cuts to swift reversals in just a few years, risk creating a prolonged perception of volatility. Such uncertainty would discourage long-term capital commitments and high-value job creation.
In this sense, higher taxes may produce short-term receipts but risk longer-term contraction, as growth projects are delayed, scaled back or redirected abroad.
What could the domestic ripple effects of higher Corporation Tax be?
A higher Corporation Tax rate wouldn’t merely impact global corporations. A vast many domestic firms, particularly those that are reinvesting profits into growth, would certainly feel the strain.
When margins tighten, decisions around hiring, expansion and pay become much more cautious as decision-makers embrace reticence over rewards. Over time, that creates very sluggish wage growth, actively limits innovation and fundamentally erodes the tax base that the policy itself sought to strengthen. SMEs in particular could be especially exposed to this.
Credibility versus growth: A compounding competition
The Treasury’s predicament isn’t singular. In fact, it mirrors that seen in other major economies: a deepening desire for fiscal credibility competing directly with the need to stimulate growth.
Raising Corporation Tax would send a message of fiscal discipline to markets, but the price it may pay would be deteriorating momentum in both productivity and employment. It could even fuel a domestic recession, which would leave economic shockwaves more pronounced than many anticipate.
From a political standpoint, the move would also cut against long-standing ambitions to brand Britain as a hub for innovation, enterprise and inward investment. Businesses, of course, positively crave consistency; a steady rate, even if only moderate, supports confidence much more effectively than constant adjustments.
The Chancellor’s challenge therefore looks a difficult summit to scale. After apparently ruling out rises to Income Tax and VAT, few revenue levers remain untouched. As such, Corporation Tax is a relatively easy target: administratively simple and visually populist… but easy options are rarely the best ones.
There are other ways to strengthen the tax base, such as closing avoidance loopholes, encouraging the repatriation of profits or incentivising reinvestment through allowances, that may well deliver stability without undermining competitiveness.
Whether these routes will be chosen remains to be seen, but the direction of travel will signal much about the government’s long-term economic intent.
Plan now for potential change
For now, any adjustment to Corporation Tax remains speculative, but businesses would be wise to model the impact of a higher rate. That includes reviewing profit forecasts, dividend strategies and capital expenditure plans to ensure flexibility whatever the Budget outcome.
Matthew Douglas works closely with our clients to assess how policy shifts could affect growth, employment and investment planning.
For straightforward, practical advice on preparing for possible changes to Corporation Tax or wider fiscal policy, contact us today to speak with our advisers.