The Prime Minister backtracked on her plan to freeze the rate companies pay on their profits at 19 per cent in the face of market turmoil over the mini-budget.
She announced the decision at an eight-minute press conference moments after sacking her Chancellor Kwasi Kwarteng and replacing him with Jeremy Hunt.
The move represented an astonishing about-turn by Ms Truss, who had staked much of her successful leadership campaign on cutting corporation tax.
She even warned during the race that putting up the levies paid by companies would be so disastrous it would tip Britain into a recession.
The cut was one of the two core pledges of her successful tilt for No 10 alongside reversing the National Insurance rise, which she is pressing ahead with.
Addressing the nation from Downing St, a stony-faced Ms Truss admitted the £45 billion of tax cuts in the mini-Budget was the cause of recent financial chaos.
“It is clear that parts of our mini-Budget went further and faster than markets were expecting, so the way we are delivering our mission right now has to change,” she said.
“We need to act now to reassure the markets of our fiscal discipline. I have therefore decided to keep the increase in corporation tax that was planned by the previous government.”
Ms Truss said the about-turn is expected to bring in £18 billion a year, plugging a significant hole in the nation’s finances which was created by the mini-Budget.
The Prime Minister had defended her plan to slash business levies as recently as Wednesday on the grounds that it would boost growth.
“I feel it would be wrong, in a time when we are trying to attract investment into our country and at a time of global economic slowdown, to be raising taxes, because it will bring less revenue in,” she said at PMQs.
That was one of 18 occasions on which she had publicly made the same argument since she announced the policy at the start of her leadership campaign.
During the battle for No 10 she consistently attacked her rival, Rishi Sunak, who drew up the plan for a rise to 26 per cent which she will now enact from April.
At a hustings in Norwich on August 25 she even said the former chancellor’s plan would “stop economic growth and put this country into a recession”.
Earlier that month, speaking during a debate in Cheltenham, she insisted that she was opposed to the corporation rise because “fundamentally I am a Conservative”.
During an interview with ITV on August 1, she said: “What we know is if you put taxes up too high it chokes off investment, it chokes off growth and it leads to bad outcomes.”
Jubilant Tory MPs who backed Mr Sunak’s leadership bid said the Prime Minister’s about-turn had “vindicated” his warnings her tax cutting plan would spark chaos.
Business leaders alarmed by U-turn
Business leaders reacted with dismay to the announcement levies on their profits will now rise and called for extra help from the Government.
Tony Danker, director-general of the CBI, said: “Raising corporation tax in 2023 may help on the fiscal credibility front but if this move is made in isolation it could backfire.
“The government should balance any rise in corporation tax with investment allowances. That way you help achieve both stability and investment.”
Stephen Phipson, the chief executive of manufacturers’ group Make UK, said ministers “cannot go on zig zagging from one policy to the next”.
He warned the “short-term decision to increase corporation tax again sends the wrong signal to investors as to how attractive the UK is as a destination for foreign investment”.
Craig Beaumont, chief of external affairs at the FSB, said small businesses had been contacting him worrying their tax bills are now set to rocket.
He added that the decision to increase the rate to 25 per cent was “not great for growth”.