Rishi Sunak has announced a big tax hike for large companies which will have to pay 25% corporation tax from 2023, up from 19%.
And the chancellor announced that he would freeze income tax thresholds from the same year, meaning plans to allow people to take home more of their pay have been shelved.
He announced the measures while revealing government borrowing is set to hit £355bn this year, leaving a huge hole in public finances due to the spending needed to respond to the coronavirus pandemic.
Sunak said he recognised the tax rises, which are likely to be opposed by some Tory MPs, would be “unpopular” and were “decisions no chancellor wants to make”, but that there was no alternative to dealing with the deficit and debt.
The highest corporation tax rate of 25%, to come in from April 2023, will only apply to 10% of companies – the biggest firms, Sunak said.
Smaller businesses with profits of £50,000 or less will be protected from the hike and will continue paying corporation tax at the current level of 19%.
Sunak said it meant 1.4m business, around 70% of companies, “will be completely unaffected”.
A so-called “taper” above £50,000 means only businesses with profits at £250,000 or greater will be charged the full 25% rate, with companies in between the two levels paying increasing levels the more profits they make.
“Even after this change the UK will still have the lowest corporation tax rate in the G7 – lower than the United States, Canada, Italy, Japan, Germany and France,” the chancellor said.
On income tax, planned increases to the personal allowance and higher rate will go ahead next year.
This means no one will pay income tax on any earnings lower than £12,570, and will only pay the higher 40% rate of income tax on earnings over £50,270.
But after that point, planned increases in those thresholds to allow people to take home even more of their pay have been cancelled.
“Nobody’s take home pay will be less than it is now as a result of this policy,” Sunak said.
“But I want to be clear with all members that this policy does remove the incremental benefit created, had thresholds continued to increase with inflation.
“We are not hiding it, I am here, explaining it to the House and it is in the budget document in black and white. It is a tax policy that is progressive and fair.”
Sunak added: “These are significant decisions to have taken.
“Decisions no chancellor wants to make.
“I recognise they might not be popular. But they are honest.
“And let’s consider the alternatives.
“The first is to do nothing. To leave our deficit problem untreated.
“Our debt problem for someone else in future to deal with. That has never been the way of a Conservative government.
“Nor do I believe it can be the way of a responsible chancellor.”
Sunak also announced that Covid measures, including furlough, business grants and the £20 Universal Credit uplift, are to continue for months to come, taking total support for this year and next to £407bn.
He said it was right to help people through an “acute” crisis like Covid, but that over the medium term debt should not be allowed to keep growing and that “in normal times” borrowing should not be used to pay for “every day public spending”.
The huge spending on Covid means total government borrowing will be £355bn this year, 17% of national income (GDP) and the highest level since the Second World War.
Next year it will fall to £234bn, a total of 10.3% of GDP, “an amount so large it has only one rival in recent history; this year”, Sunak said.
“Without corrective action, borrowing would continue at very high levels, leaving underlying debt rising indefinitely”.
But the steps Sunak is taking means it will fall to 4.5% of GDP in 2022-3 and gradually down to 2.8% by 2025-6.
This means underlying government debt will rise from 88.8% this year to a peak of 97.1% in 2023-4.
“Let me explain why this matters,” Sunak said.
“The amount we’ve borrowed is only comparable with the amount we borrowed during the two world wars.
“It is going to be the work of many governments, over many decades, to pay it back.
“Just as it would be irresponsible to withdraw support too soon, it would also be irresponsible to allow our future borrowing and debt to rise unchecked.”