What’s the Impact of the 2023 Autumn Statement?

What does the Autumn Statement mean for you and your business?

Here at TAG Accountants, our team of tax advisors think that Jeremy Hunt’s Autumn Statement on 22 November 2023 appeared in some respects to be a bit of a pre-election give-away, being billed as a focus on reducing debt, cutting tax, and rewarding hard work. 

That said, we’ve set out below the headline points from the Statement along with some key indications as to how they may impact you and/or your business.

Cuts to National Insurance Contributions (“NICs”)

Employees earning more than £12,570 a year are required to pay Class 1 NICs and the main rate of Class 1 NICs will be cut from 12% to 10% from 6 January 2024, i.e., before the end of this tax year. Over a full year, an average worker earning £35,400 will receive a NIC reduction of over £450. Workers earning over £50,270 a year will receive an annual NIC reduction of £754.

There could be a small benefit in deferring bonus payments to employees until after 6 January 2024, but the maximum impact will only be £63 in employee NICs.

For earnings above £50,270 a year, the Class 1 NIC rate will remain at 2%.

No changes have been announced to the rate of employer’s Class 1 NICs rate of 13.8%.

Self-employed individuals with profits of more than £12,570 a year pay both Class 2 and Class 4 NICs. Class 2 NICs have previously been at a flat rate sum of £179.40 a year (or £3.45 a week) but for the 2024/5 tax year, the self-employed will not be required to pay the charge. In addition, the main rate of Class 4 NICs will be cut from 9% to 8% from 6 April 2024, but remain at 2% on profits over £50,270.

Overall, an average self-employed person with profits of £28,200 will save £336 in NICs in 2024/25. 

One thing to be aware of is that Class 2 NICs currently provide the self-employed with access to certain state benefits, including the State Pension. So, from 6 April 2024, self-employed people with annual profits above £12,570 will continue to receive access to these benefits. If profits fall between £6,725 and £12,570 self-employed people will continue to receive access to these benefits, by receiving a National Insurance credit. For those with profits under £6,725 (or with losses), self–employed people will have to continue to pay Class 2 NICs on a voluntary basis to maintain their access to these state benefits. 

Incorporation versus self-employed status

In recent years, the tax benefit between having an incorporated compared to a sole trader business has continued to decline. The above reductions in NICs for the self-employed, together with the continued erosion of the annual dividend allowance means that, in most cases, the tax difference is now marginal with the only real tax benefit of incorporation being the ability to control the amount of taxable profits being drawn out the company annually. This means the decision between the two structures is more likely to be driven by other commercial considerations in the future.

Increases in State Benefits

Despite rumours to the contrary, the government will increase all working age benefits for 2024/25 by the September 2023 Consumer Price Index (CPI) of 6.7%. In addition, State Pensions continue to benefit from the “triple lock,” meaning increases to the basic State Pension, new State Pension and Pension Credit standard minimum guarantee of 8.5%.

Rises in national living wage (“NLW”)

The largest ever increase to the NLW has been made with eligibility being extended by reducing the age threshold to 21-year-olds for the first time (down from those aged twenty-three and over only). From 1 April 2024, NLW rates will be as follows:

There has been no support provided to employers to implement this meaning we can expect price increases in industries such as retail and hospitality where NLW rates are prevalent.

Capital allowances for businesses

The Annual Investment Allowance (“AIA”) is now permanently set at £1million per year, allowing businesses to claim tax relief at 100% on up to £1million of expenditure on qualifying plant and machinery, new or used (e.g., capital equipment). Note in a group situation this allowance is spread across the group. This is more flexible than the alternative “full expensing” scheme referred to below and will be sufficient for the capital expenditure of the vast majority of UK SMEs.

There is now an additional scheme called ‘full expensing’ available to companies only, allowing unlimited 100% upfront tax relief on qualifying new plant and machinery that is purchased on or after 1 April 2023. There is also an associated 50% allowance for expenditure on certain types of plant and machinery that do not qualify for the full 100% (including space and water heating systems, for example). This scheme was originally announced in the Spring with an end date of March 2026 but will now be available permanently, albeit will usually only benefit companies or groups of companies that have already utilised their £1million AIA. It is not available to unincorporated businesses, although the expansion of the cash-basis (see below) achieves a very similar effect for sole traders and partnerships.

The scheme has some complicated rules on the amount of upfront relief and the calculation of tax charges that may apply when the purchased plant and machinery is sold, so it is worth taking advice from us if you are considering utilising this scheme.

Design changes to MTD for Income Tax

As a reminder, MTD for income tax will require businesses to maintain digital records and send a quarterly summary of their business income and expenses to HMRC using MTD-compatible software. The plan remains to phase this in from April 2026, starting with sole traders and property landlords with gross income over £50,000. 

Some ‘design changes’ to the scheme have now been announced to try and simplify and improve the system, such as:

• Simplifying the requirements for filing quarterly updates by making them cumulative and with the ability to amend or correct errors throughout the year.
• Simplifying the rules for taxpayers with more complex affairs, e.g., landlords with jointly owned property.
• Removing the filing of an End of Period Statement, with emphasis instead placed on a final declaration.
• Exempting some taxpayers such as foster carers altogether; and
• Enabling taxpayers using MTD to be represented by more than one tax agent.

There will also be new rules to ensure that taxpayers who volunteer to join MTD for income tax from April 2024 will be subject to the new, fairer points-based penalty regime for late filing of tax returns and late payment of tax. 

Business rates announcements

A new business rates support package was announced over the next five years to support small businesses and the high street. For 2024/25, the small business multiplier will continue to be frozen and the 75% Retail, Hospitality and Leisure business rates relief will continue.

The standard rate multiplier will be uprated in line with the September 2023 CPI of 6.7%, which will increase business rates bills for some businesses against which they may benefit from the impact of the “full expensing” scheme. 

Reminder of basis period reform for unincorporated businesses

If your unincorporated business prepares annual accounts to a year-end date not co-terminous with the tax year, then you will need to either change your accounting year-end to line up with the tax year or adopt a new process for how the profits or losses arising in your accounts are reported to HMRC. 

The existing ‘basis period’ rules allow annual accounts that end during a tax year to act as the basis of profits or losses arising in that tax year, but this is being reformed, with the new rules starting with transitional rules in 2023/24. From 2024/25, actual profits arising in a tax year must be reported to HMRC on an actual basis which would require combining appropriate proportions of tax-adjusted profits for the parts of each accounting period that overlap with a tax year where the year-end of your business is not in line with the tax year.

We are here to discuss the implications of this with you to understand the full implications.

Default cash accounting for unincorporated businesses

The ‘cash basis,’ a simplified way of calculating taxable profits based on simply declaring income received and expenses paid, without adjustments for accruals, prepayments etc, has always been an option for sole traders and partnerships with a turnover of less than £150,000. 

From 6 April 2024, the cash basis will become the default accounting basis for all unincorporated businesses with no turnover limit.

Businesses can ‘opt out’ of the cash basis by ticking a box on the tax return and continue to prepare a balance sheet and use the ‘accruals basis’ if they wish and we would imagine, if you use the accruals basis now, there is no real reason to change this as it provides a more accurate picture of how your business is performing. 

VAT – nothing really to report

The VAT registration and deregistration thresholds remain frozen at £85,000 and £83,000 respectively, despite this being seen as a blocker to growth in small businesses.

No changes to rates of VAT have been made.

Income tax – allowances continue to be frozen

The personal allowance and basic rate band threshold remain frozen at their 2021/22 levels and could remain at the same levels until 5 April 2028. As earnings increase, more taxpayers will be pushed into higher tax bands through ‘fiscal drag’ – increasing the tax take without the government increasing income tax rates.

The tax-free personal allowance of £12,570 continues to taper away for higher earners, with £1 of personal allowance lost for every £2 of adjusted net income over £100,000. 

Income tax bands will be held at their 2023/24 levels as follows:

The 0% personal savings allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers remains untouched.

The dividend allowance reduces to £500 in 2024/25, down from £1,000 in 2023/24. 

Note that individuals living in Scotland and classed as Scottish taxpayers are also entitled to the personal allowance of up to £12,570 but have a slightly different banding system to England and Wales. The Scottish Budget, in which rates and bands for 2024/25 will be announced, is set to take place on 19 December 2023.

ISA limits unchanged

The annual limits for Individual Savings Accounts (ISAs), Child Trust Funds and the Junior ISA remain at £20,000, £9,000, and £9,000 respectively in 2024/25. The lifetime ISA annual subscription limit is unchanged at £4,000 (excluding the government top-up bonus).

ISAs are to be simplified, further digitalised, and provide more choice, making it easier to choose the best ISA accounts and move money between them.

Pension allowances and the lifetime provider model

The annual pension allowances will remain fixed in 2024/25 at their 2023/24 rates, being the £60,000 annual allowance applicable in most circumstances and the £10,000 money purchase annual allowance for those who have flexibly accessed their pension pot. The annual allowance is reduced for those with a high income of more than £260,000. 

With people (especially younger generations) changing jobs more frequently than used to be the case, the government wants to tackle the long-standing problem of “small pot” pensions that accumulate with each short to medium term employment. A ‘lifetime provider model’ is being considered, which would allow individuals to have contributions paid into their existing pension scheme when they change employers.

Reduced capital gains annual allowance

The capital gains tax annual exemption is set to drop to £3,000 in 2024/25, down from £6,000 in 2023/24. This change will mean that those selling capital assets such as property or shares could have higher tax bills. The rates of capital gains tax rates are unchanged, ranging from 10% to 28% in 2023/24, depending on the tax status of the seller and the type of asset sold.

If you are expecting to crystallise capital gains, it would be sensible to contact us to discuss the best strategy and timing for the disposal.

Inheritance tax

As previously announced, the inheritance tax nil rate band will remain at £325,000 until April 2028 as will the residence nil rate band at £175,000. Tapering down of the residence nil rate band still commences at £2 million value of the estate.

Changes to or even abolition of inheritance tax was mooted in the media and this area may be revisited in the Spring Budget.

Corporation tax rises retained

From 1 April 2024, the rate of Corporation Tax will continue at 25% for profits over £250,000, with the small profits rate of 19% will applying where profits are £50,000 or less.

Where profits fall between £50,000 and £250,000 a year, the profits are taxed at the higher 25% rate, but a ‘marginal relief’ is given to reduce the liability – note that profits falling within this range have an effective tax rate of 26.5%.

Companies in the same corporate group (or otherwise connected by association) must share the £50,000 and £250,000 thresholds between them, making the 25% rate more likely to apply. A similar rule applies to the £1.5million threshold which, if exceeded, means that companies are required to pay their corporation tax earlier and in instalments.

R&D tax reliefs – merging of schemes means less relief for SMEs

For accounting periods from 1 April 2024, a new R&D scheme for limited companies will come into effect, which is a merger of the current R&D Expenditure Credit (RDEC) scheme (for larger companies) with the Small and Medium Enterprise (SME) scheme. In addition, there will be a second new R&D scheme for R&D intensive SMEs.

This may not be the end of the story as HMRC says that further action may still be needed to reduce the unacceptably high levels of non-compliance with tax rules in the R&D sector. 

These new rules contain new provisions in relation to:

• Who can claim relief when companies contract out R&D activities.
• The definition of qualifying expenditure, taking into account whether the R&D has been undertaken in the UK,
• The qualifying criteria for R&D intensive companies, and
• Restrictions on nominations and assignments of R&D relief payments.

In practical terms, this means any company claiming (or considering claiming) R&D reliefs will need enhanced support to both ensure compliance and to adopt the new rules and framework – we can pass you on to expertise in this area if required.

Our team here at TAG Accountants is always to help

There is plenty to think about following these latest announcements and our experts here at TAG Accountants are here to help you to understand the impact they may have on you and your business and to ensure that where possible, any future tax liabilities are kept to a minimum. 

If you would like to know more, just call our office on 01902 783172 to discover how our specialist tax services team could guide you through all of this, or alternatively, please contact us by using our online enquiry form which you can find HERE.

We very much look forward to speaking with you.