UK's Labour makes election pledge to cap corporation tax at 25%

Seeking to offer stability to businesses, party says it will cap corporation tax for up to five years if it wins an election expected later this year

Rachel Reeves said Labour will cap UK corporation tax for up to five years if elected. Picture: PA

Britain's opposition Labour Party will cap corporation tax at 25% if it wins the next election and will look to cut that rate if needed, the party's finance policy chief Rachel Reeves told business leaders.

Businesses have long complained about a lack of visibility on everything from tax levels to incentive schemes in Britain, which they say hinders their ability to invest and improve productivity.

Successive Conservative governments steadily cut corporation tax in a bid to boost Britain's competitiveness, but the covid-19 pandemic and Russia's war in Ukraine forced them to hike rates last year to cover higher spending.

Labour, seeking to offer stability to businesses, said it would cap corporation tax for up to five years if it wins an election expected in the second half of this year, and also maintain a major tax break on corporate investment.

"We will cap the headline rate of corporation tax at its current rate of 25% for the duration of the next parliament," Ms Reeves said in a speech at a Labour Business Conference in London. "And should our competitiveness come under threat, if necessary, we will act."

Traditionally left-leaning, Labour is seeking to position itself as the most business-friendly party in Britain ahead of the general election, and Ms Reeves highlighted the turmoil in the Conservative Party that has produced five prime ministers in eight years.

Labour has a large lead over the governing Conservative Party in opinion polls.

The rate of corporation tax fell from 30% in 2007 to 19% in 2017. It was raised in April 2023 to 25%, the highest level since 2011, as the government sought to raise revenue after spending heavily on the coronavirus pandemic and subsidising soaring consumer energy bills.

Ms Reeves defended a target to spend £28bn a year on green projects in the second half of a Labour government, but said she would not break "iron-clad" fiscal rules to reach it.

Keir Starmer said Labour would keep a tight rein on British government finances. Picture: Stefan Rousseau/PA Wire

Addressing hundreds of businesspeople, Labour leader Keir Starmer said the party's ability to attract such an audience was "vindication" of the journey he had taken Labour on, and stressed Labour would keep a tight rein on government finances.

We cannot, and we will not, allow public spending needs, however important, to threaten the stability of our finances.

Business welcomed the commitment to a stable economic environment and the corporation tax cap, which marks a clear break from the previous Labour leadership's pledge to raise it.

"Giving certainty that the headline corporation tax rate will not rise will also give businesses clarity and ensure the UK remains competitive," said Rain Newton-Smith, chief executive of the Confederation of British Industry (CBI).

Rachel McEwen, chief sustainability officer at energy company SSE, welcomed Labour's "heroic" mission to decarbonise the economy by 2030, but wanted more detail on what it would do differently.

Ms Reeves said Labour would fix the planning system, adding that she would maintain permanent full expensing — a tax break on business investment — and publish a roadmap for business taxation in the first six months of a Labour government.

Ms Newton-Smith of the CBI said the commitment to a tax roadmap was a "bold move that can give businesses the certainty they need to invest over the years and decades to come".

The full-expensing tax break was introduced by prime minister Rishi Sunak's party as a way to offset the 2023 rise in UK corporation tax.

In November the Conservatives said the relief, which applies to investments in plant and machinery, would be made permanent.

In their own pitch to voters, the Conservatives cut some personal taxes last November and have been eyeing further cuts at a budget due on March 6, but UK finance minister Jeremy Hunt said public finances might not allow that.

• Reuters