The rate of corporation tax, paid on company profits, is to rise to 25% from 19%, starting in 2023.
Chancellor Rishi Sunak said it was “fair and necessary” for business to contribute to the economic recovery.
But he also unveiled a “small profits rate” to benefit small firms, and extra tax breaks to spur investment.
Paul Johnson, director of the Institute for Studies, said the rise in the headline rate was at the top end of expectations, calling it “risky”.
Mr Sunak maintained that even with the rise to 25% “the UK will still have the lowest corporation tax rate in the G7” group of leading nations.
“The government is providing business with over £100bn of support to get through this pandemic, so it is fair and necessary to ask them to contribute to our recovery,” the chancellor told the Commons.
But he said a new small profits rate would maintain the 19% rate for firms with profits of £50,000 or less, meaning that about 70% of companies – 1.4 million businesses – would be “completely unaffected” by the tax hike.
And there will be a taper above £50,000, so that only businesses with profits of £250,000 or greater will be taxed at the full 25% rate – about 10% of firms.
Mr Sunak said: “So yes, it’s a tax rise on company profits. But only on the larger, most profitable companies. And only in two years’ time.”
Nevertheless, economist Mr Johnson described the headline rise as “huge”. He tweeted: “Right at the top of expectations. Extraordinary reversal of longstanding policy. Risky.”
And while Tony Danker, director-general of the CBI, welcomed many measures in the Budget, he said: “Moving corporation tax to 25% in one leap will cause a sharp intake of breath for many businesses and sends a worrying signal to those planning to invest in the UK.”
However, Mr Sunak sought to temper the rise with an announcement of a “super-deduction” for companies when they invest, boosting the amount firms can offset against their tax bill.
He said that for example, under existing rules, a construction firm buying £10m of new equipment could reduce its taxable income for the year by £2.6m, but with the “super-deduction”, the company could reduce it by £13m.
“We’ve never tried this before in our country,” Mr Sunak said. He quoted the Office for Budget Responsibility as saying it would boost investment by 10%, about £20bn higher per year.
“It makes our tax regime for business investment truly world-leading, lifting us from 30th in the OECD, to first,” he said.
Corporation tax is one of the main revenue earners for the Treasury. One reason it has been lowered over the decades was to attract investment into the UK. Receipts from corporation tax were £55.1bn in 2018-19 and £63.2bn in 2019-20.
The tax was introduced in 1965 at 40%, rose to 52% in the 1970s and was slowly cut to 19% in 2017.
Despite Mr Sunak’s assertion that the UK’s corporation tax rate would still be favourable on international comparisons, law firm Clifford Chance said the hike would make the UK’s effective rate higher than that of other key nations.
“The surprising effect of the rise in corporation tax is that the UK will have one of the highest effective rates in the world, almost level with the French rate, and much higher than the US or German rate,” said Dan Neidle, tax partner at the law firm.