Throughout this article, the term "pound" and the £ symbol refer to the Pound sterling.
Corporation tax in the United Kingdom is a corporate tax levied in on the profits made by UK-resident companies and on the profits of entities registered overseas with either permanent establishments or property businesses in the UK. Companies are resident in the UK if they are either incorporated or centrally managed and controlled in the UK.INTM120030, International Manual, HMRC
Until 1 April 1965, companies were taxed at the same income tax rates as individual taxpayers, with an additional profits tax levied on companies. Finance Act 1965 replaced this structure for companies and associations with a single corporate tax, which took its basic structure and rules from the income tax system.
Originally introduced as a classical tax system, in which companies were subject to tax on their profits and companies' shareholders were also liable to income tax on the dividends that they received, the first major amendment to corporation tax saw it move to a dividend imputation system in 1973, under which an individual receiving a dividend became entitled to an income tax credit representing the corporation tax already paid by the company paying the dividend. The classical system was reintroduced in 1999, with the abolition of advance corporation tax and of repayable dividend tax credits. Another change saw the single main rate of tax split into three. Tax competition between jurisdictions reduced the main corporate tax rate from 28% in 2008–2010 to a flat rate of 19% as of April 2017. It then reversed back again in April 2023, increasing to 25% for companies with profits in excess of £250,000.
The UK government faced problems with its corporate tax structure, including European Court of Justice judgements that aspects of it are incompatible with EU treaties. Tax avoidance schemes marketed by the financial sector have also proven an irritant, and been countered by complicated anti-avoidance legislation.
The complexity of the corporation tax system is a recognised issue. The New Labour government (1997–2010), supported by the opposition parties, carried through wide-scale reform from the Tax Law Rewrite Project, resulting in the Corporation Tax Act 2009 and Corporation Tax Act 2010. Before these statutes, corporation tax was largely governed by the Income and Corporation Taxes Act 1988. Corporation tax has slowly been integrating generally accepted accounting practice, with the corporation tax system in various specific areas based directly on the accounting treatment.
UK corporation tax receipts have risen markedly over the last decade. From £37.4bn in 2013-14 to £92.2bn in 2023-24, and are forecast to rise to £112.6bn in 2028-29. Note: these figures exclude offshore oil and gas corporate income tax.
History
Until 1965, companies were subject to income tax on their profitsCorporate Tax (PDF) at the same rates as was levied on individual taxpayers. A dividend imputation system existed, whereby the income tax paid by a company was offset against the income tax liability of a shareholder who received dividends from the company. The standard rate of income tax in 1949 was 50%. If the company paid a £100 dividend, the recipient would be treated as if he had earned £200 and had paid £100 in income tax on it – the tax paid by the company fully covered the tax due from the individual on the dividend paid. If, however, the individual was subject to tax at a higher rate (known as "surtax"), he (not the company) would be liable to pay the additional tax.
In addition to income tax, companies were also subject to a profits tax, which was deducted from company profits when determining the income tax liability. It was a differential tax, with a higher tax rate on dividends (profits distributed to shareholders) than on profits retained within the company. By penalising the distribution of profits, it was hoped companies would retain profits for investment, which was considered a priority after the Second World War. The tax did not have the desired effect, so the distributed profits tax was increased by 20%"50 years ago ", Newark Advertiser. Retrieved 8 March 2015 by the post-war Labour government to encourage companies to retain more of their profits. At the time of Hugh Gaitskell's 1951 budget, the profits tax was 50% for distributed profits and 10% for undistributed profits.
A series of reductions in the profits tax were brought in from 1951 onwards by the new Conservative government. The tax rates fell to 22.5% on distributed profits and 2.5% on undistributed profits by 1957, but the profits tax was no longer income tax-deductible. Derick Heathcoat-Amory's Budget of March 1958 replaced the differential profits tax with a single profits tax measure, applicable to both retained and distributed profits. This gradual decrease, and final abolition, of taxes on capital distributions reflected ideological differences between the Conservative and Labour parties: the Conservative approach was to distribute profits to capital holders for investment elsewhere, while Labour sought to force companies to retain profits for reinvestment in the company in the hope this would benefit the company's workforce.
Finance Act 1965 Finance Act 1965 replaced the system of income tax and profits tax from 1 April 1965 with the Corporation Tax, which re-introduced aspects of the old system. Corporation Tax was charged at a uniform rate on all profits, but additional tax was then payable if profits were distributed as a dividend to shareholders. In effect, dividends suffered double taxation. This method of corporation tax is known as the classical system and is similar to that used in the United States. The effect of the tax was to revert to the distribution tax in operation from 1949 to 1959: dividend payments were subject to higher tax than profits retained within the company. Finance Act 1965 also introduced a capital gains tax, at a rate of 30%, charged on the gains arising on the disposal of capital assets by individuals. While companies were exempted from capital gains tax, they were liable to corporation tax on their "chargeable gains", which were calculated in substantially the same way as capital gains for individuals. The tax applied to company shares as well as other assets. Before 1965, capital gains were not taxed, and it was advantageous for taxpayers to argue that a receipt was non-taxable "capital" rather than taxable "revenue".
Advance corporation tax
The basic structure of the tax, where company profits were taxed as profits, and dividend payments were then taxed as income, remained unchanged until 1973, when a partial imputation system was introduced for dividend payments. Unlike the previous imputation system, the tax credit to the shareholder was less than the corporation tax paid (corporation tax was higher than the standard rate of income tax, but the imputation, or set-off, was only of standard rate tax). When companies made distributions, they also paid the advance corporation tax (known as ACT), which could be set off against the main corporation tax charge, subject to certain limits (the full amount of ACT paid could not be recovered if significantly large amounts of profits were distributed).Company Taxation Manual CTM20105 – ACT: set-off against CT on profits: introduction, HMRC. Retrieved 13 April 2007 Individuals and companies who received a dividend from a UK company received a tax credit representing the ACT paid.Company Taxation Manual CTM16120 – Distributions: impact on CT: franked investment income: general, HMRC. Retrieved 12 April 2007 Individuals could set off the tax credit against their income tax liability.Company Taxation Manual CTM15150 – Distributions: general: tax consequences, HMRC. Retrieved 12 April 2007
On introduction, ACT was set at 30% of the gross dividend (the actual amount paid plus the tax credit). If a company made a £70 dividend payment to an individual, the company would pay £30 of advance corporation tax. The shareholder would receive the £70 cash payment, plus a tax credit of £30; thus, the individual would be deemed to have earned £100, and to have already paid tax of £30 on it. The ACT paid by the company would be deductible against its final "mainstream" corporation tax bill. To the extent that the individual's tax on the dividend was less than the tax credit – for example, if his income was too low to pay tax (below £595 in 1973–1974Income Tax Personal Allowances and Reliefs 1973–74 to 1989–90 (PDF) , HMRC. Retrieved 9 April 2007) – he would be able to reclaim some or all of the £30 tax paid by the company. The set-off was only partial, since the company would pay 52% tax (small companies had lower rates, but still higher than the ACT rate), and thus the £70 received by the individual actually represented pre-tax profits of £145.83. Accordingly, only part of the double taxation was relieved.
ACT was not payable on dividends from one UK company to another (unless the payor company elected to pay it).Company Taxation Manual CTM20070 – ACT: general: qualifying and non-qualifying distributions, HMRC. Retrieved 12 April 2007 Also, the recipient company was not taxed on that dividend receipt, except for dealers in shares and life assurance companies in respect of some of their profits. As the payor company would have suffered tax on the payments it made, the company that received the dividend also received a credit that it could use to reduce the amount of ACT it itself paid, or, in certain cases, apply to have the tax credit repaid to them.
The level of ACT was linked to the basic rate of income tax between 1973 and 1993. The March 1993 Budget of Norman Lamont cut the ACT rate and tax credit to 22.5% from April 1993, and 20% from April 1994. These changes were accompanied with a cut of income tax on dividends to 20%, while the basic rate of income tax remained at 25%. Persons liable for tax were lightly affected by the change, because income tax liability was still balanced by the tax credit received, although higher rate tax payers paid an additional 25% tax on the amount of the dividend actually received (net), as against 20% before the change. The change had bigger effects on pensions and non-taxpayers. A pension fund receiving a £1.2 m dividend income prior to the change would have been able to reclaim £400,000 in tax, giving a total income of £1.6 m. After the change, only £300,000 was reclaimable, reducing income to £1.5 m, a fall of 6.25%.
Gordon Brown's summer Budget of 1997Budget 1997 , HM Treasury. Retrieved 25 April 2007 ended the ability of pension funds and other tax-exempt companies to reclaim tax credits with immediate effect, and for individuals from April 1999. This tax change has been blamed for the poor state of British pension provision, while usually ignoring the more significant effect of the dot-com crash of 2000 onwards when the FTSE-100 lost half its value to fall from 6930 at the beginning of 2000 to just 3490 by March 2003. Despite this, critics such as Member of Parliament Frank Field described it as a "hammer blow" and the Sunday Times described it as a swindle, with the hypothetical £1.5 m income described above falling to £1.2 m, a fall in income of 20%, because no tax would be reclaimable.
Abolition of advance corporation tax