The corporation tax hike announced in the Budget on Wednesday may not be delivered without additional concessions, according to the Institute for Fiscal Studies (IFS).
Rishi Sunak said that larger companies will be charged with a 25% corporation tax on profits starting in 2023, raising £16bn and £17bn respectively in the following two years.
Only businesses with profits of £250mln will be taxed at the full rate, meaning only 10% of UK firms will be charged the highest tax.
However, the IFS said the money raised is likely to be lower over the long run, although it would take the UK well up the international league table for corporation tax revenues.
It would also take revenues above their level back in 2010 when the coalition government set about its series of rate reductions.
The Chancellor has also announced long-term freezes in various tax allowances and thresholds, which are estimated to raise £9bn, while potentially cutting £4bn per year from cash plans for public service spending after 2022.
“[If the numbers] are delivered they would get the public finances into current balance – i.e. borrowing only to invest – by 2025-26. The sad truth is that that would be a balance built on the highest sustained tax burden in UK history and yet further cuts in unprotected public service spending,” said IFS Director Paul Johnson in a release.
“That is perhaps one measure of the difficulties presented by more than a decade of paltry growth followed by the deepest recession in history.”
In fact, the Office for Budget Responsibility now estimates that the overall UK tax burden should reach 35% of GDP by the financial year ending in April 2026, its highest level since 1970.
According to City broker Peel Hunt, companies should benefit from faster GDP growth generating higher tax receipts, even with the longer-term increase in corporation tax.
“If all goes well, it may not be needed, but the fiscal projections also included some implausible assumptions about departmental spending cuts,” analysts said.
Peer Liberum said the change in corporation tax will lower earnings by 7% from calendar year 2024 onwards and about 5% in calendar year 2023, which it estimates would hit the value of future cash flows to shareholders by around 6%.
“Housebuilder management teams have noted to us in the past that the fall in the corporate tax rate drove higher dividend payouts. This is likely to work in reverse, so we would expect dividends to reduce all else being equal,” analysts commented.