Effective tax rate vs headline rate
The headline rate (also called the statutory rate) is the rate written into the law. The effective tax rate is what a company actually pays as a share of its true economic profit, after every deduction, relief, credit and profit-shifting arrangement. A company can face a 25% headline rate and an effective rate of 5% if it has moved most of its profit to a zero-tax jurisdiction, claimed generous credits and maximised deductible interest. The World Bank / IFS study of 13 countries found that around a third of the largest firms face an effective rate below the 15% global minimum, and that the top 1% of firms pay an effective rate roughly 3 percentage points below the top 10%. For a small business, the headline rate and the effective rate are usually almost the same number.
ByLoopholeKiln EditorialPublished
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Example: a large group with £1bn of UK profit might report an 8% effective rate after patent box relief, intra-group interest and deferred tax, while a UK firm with £200,000 of profit pays close to the full rate.
Why it matters to a small business: you almost certainly pay close to the headline rate. A large competitor may pay a fraction of it, and fund lower prices or fatter margins out of the difference.