The rate of corporation tax is going up in the UK! That’s right, starting next month, companies with over £250,000 in profits will have to pay 25% in corporation tax instead of the current 19%. 

Corporation tax is a tax that companies pay on their profits. So, if a company makes £1 million in profit, they’ll have to pay £250,000 in corporation tax under the new rules.

But hold on, there’s more! The Chancellor, Jeremy Hunt, also announced a new scheme that allows businesses to deduct the full cost of their IT equipment, plants or machinery from their taxable profits. This is called “full capital expensing” policy, and it will be in place for three years initially. The government hopes to make it permanent soon after.

The new scheme is good news for businesses because they can deduct the full cost of their investments from their taxable profits. This means they’ll have to pay less corporation tax overall.

But not everyone is happy about the new tax rules. Some Conservative MPs still oppose it, and even former Prime Minister Liz Truss tried to scrap the policy last year. She wanted to keep the corporation tax rate at 19%, which was a key part of her low-tax leadership platform.

Despite the opposition, the Chancellor believes that the new policies will help the economy grow. He said that only 10% of businesses will pay the full rate of corporation tax, and the new “full capital expensing” policy is equivalent to a corporation tax cut worth an average of £9 billion a year. The Office for Budget Responsibility (OBR) also thinks that the new policies will encourage businesses to invest more, which will lead to a 3% increase in business investment each year.

So, there you have it! The new tax rules might be controversial, but they’re designed to help businesses and the economy. We’ll have to wait and see how they work out in practice.

THINK LIKE AN ECONOMIST!

Q1. Explain how the increase in corporation tax is an example of fiscal policy.

Q2. Draw an AS/AD diagram to show the possible impact of the increase in corporation tax on economic growth.

Q3. Discuss the effectiveness of the policy outlined in the article on “helping the economy grow”.

Click here for the source article

TheCuriousEconomist

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