Few economic budgets have been more anticipated than Rishi Sunak’s recent offering, particularly as this was delivered in response to the unprecedented socio-economic challenges caused by the coronavirus.

While some described the budget as something of a damp-squib, however, one interesting element was the decision to hike corporation tax levels paid on company profits from 19% to 25% in April 2023.

However, there’s more to this than meets the eye, so what exactly do London entrepreneurs need to know about this tax hike and the budget as a whole?

Outlining the Corporation Tax Hike

While the decision to increase corporation tax by 6% in two years time was initially met with disappointment amongst economists, there are a couple of important caveats to keep in mind.

Firstly, companies with profits under £50,000 will remain at 19%, meaning that only 10% of national companies (and a slightly higher proportion of London firms) will ultimately pay the higher rate.

This is seen as a sizable break for small businesses in the capital and nationwide, particularly given how these entities have been adversely affected by the coronavirus and lockdown measures.

At the same time, Chancellor Sunak also unveiled a so-called “super deduction” tax relief for businesses in a bid to spur sustained investment.

More specifically, firms that commit to investing in themselves and creating jobs over the next two years will be able to reduce their overall tax burden by 130% of the cost, with this translating into a significant tax cut that will most likely benefit larger firms impacted by the corporation levy increase.

However, this deduction will only apply to companies investing in qualifying new plant and machinery assets, making most serviced-based ventures in the capital unable to benefit from this.

Exploring the Impact of These Measures in the Capital

Ultimately, the decision to hike corporation tax rates in the future may prove something of a red-herring, as they’ll only ultimately apply to larger, service-oriented firms that refuse to invest in their growth and development during the next two years.

It can also be argued that this contradiction may be confusing for some business ventures, although it was interesting to note that forex broker Tickmill highlighted the rise of the pound against the Euro in the immediate aftermath of the budget.

Ultimately, large-scale financial services firms in the capital (which underpin the region’s growth) may be most concerned about the tax hike, especially as they may be ineligible for the subsequent super deduction tax breaks.

This is particularly true as a hike to 25% in two years’ time will make the UK less competitive than some of its European rivals, including Poland (19%), Denmark (22%) and fast-growing Turkey (22%).

It will also put it on a par with Spain and the Netherlands, potentially making London’s status as the continent’s financial capital more vulnerable in a post-Brexit landscape.

This will definitely be an interesting space to watch in the near-term, particularly as growth returns to the UK economy through 2021.