I enclose our normal autumn statement review, based on statements and announcements available on 22nd November 2023, as applicable to our core clients, being small limited companies, landlords and individuals.
The key points today:
Please appreciate this is written very quickly, and will be updated over the next 24 hours.
I outline the impacts below, including things that have already been announced and are coming into play over the next year or two.
Virtually no changes I could spot for small companies.
Please see Appendix Two for details on the new Corporation Tax Regime which is still very relevant.
Companies House Reporting
P&L information to be disclosed publicly.
Currently we are in a “minimal disclosure” regime with Companies House filing. Micro entities currently publish very little in the public domain, just some aggregated balance sheet data. On 26th October a dull sounding bill The Economic Crime and Corporate Transparency Act 2023 was passed, partly to stem the UK’s reputation as the “Laundromat” for dodgy cash. This has some quite significant implications for reporting for smaller entities as there is a requirement to release profit information on the public register. Right now we don’t know to what degree and from when this will start, but it will mean more disclosures than now. I will no doubt be returning to this topic over the next 12 months. It may be as little as a single line of net profit, or could include turnover and other details.
R&D Tax Credits
Pre-notification of claims required
The administration around R&D tax credits is being considerably tightened. This has been a long time coming with HMRC estimating 50% of claims containing an element of non-compliance. Which on £8BN of annual tax relief (about 1p on income tax) is a tad on the high side.
The new and very lengthy guidance notes haven’t made my reading list yet but adds a huge process to making a claim. Pre-notification requirements are likely to kill off most of the more dubious claims from the “ambulance chasing” outfits who you can easily spot from not only cold calling you, but starting with the line, “your accountant doesn’t understand R&D tax credits”.
The good news in all of this is that genuine projects which do require R&D relief for the development of something groundbreaking should be able to get funding, which is its original purpose. It is not supposed to be just a big number for the Chancellor to read out and sound like genuinely are investment in the UK economy.
Nothing for you I am afraid unless you are converting a house into two flats as it sounded like a planning change, albeit much higher charges to be paid in general on planning fees.
Worth reminding you of:
The temporary expansion of the nil rate SDLT band to £250,000 will end in March 2025.
60 Day Report and Pay
If you sell your let property any Capital Gains Tax needs to be reported and paid within 60 days of the sale, unless you sell during February or March and we can file your 2023/24 tax return before the 60 day clock runs out.
A few points here.
Employees National Insurance
Main rate of employee NI cut from 12% to 10%
This is helpful, but employer’s NI remains unchanged at 13.8%, and it would appear the rate for higher rate tax-payers remains at 2% as no reduction appears in the documents I have seen so far.
However, not content with a simple change, this is to come in from January 6th. This is a significant problem for PAYE systems and employers. Not all will be configured to deal with a mid year change………..another own goal for UK productivity trying to sort that mess out.
Sole Traders NI
Class 2 NI abolished (from 2024)
I am very relieved to see Class 2 NI abolished (for the second time, it was announced in 2017). This raises a tiny amount of tax for considerable administrative effort, especially when HMRC’s systems go wrong. My main practical concern however is that the Class 2 record is the trigger for a qualifying year for state pension. Unless a new system is introduced in just 4 months, it sounds like registration will still be required, but with a payment of nil. Given how poor this system is, and without a missing payment to trigger investigation it sounds like a significant pension problem may arise down the line.
Class 4 NI reduced from 9% to 8% (from April 2024)
The 1% cut in class 4 is welcome and NI slightly reduces the incentive to trade via a Limited Company as there is no corresponding cut to dividend taxes.
No change, despite the extensive pre-briefing in the past week.
I can only assume the kite flying on this topic resulted in the conclusion that this would be unpopular to the voters they are trying to win back, or so widely popular it will get announced pre-election.
Making Tax Digital (quarterly reporting)
Further technical updates on this project
Worryingly my least favourite project (replacing the tax return with a return of taxes on a quarterly basis) still seems to be alive. There were some measures aimed at ‘simplifying’ the quarterly reporting. I had hoped this would be quietly dropped as publicly there has been little engagement on this issue for some time with accountants, but it still seems to be plodding forward.
Frozen Personal Tax Allowances from 2022
All bands for Income taxes to be frozen until April 2028
As reported previously, with inflation even at a new “low” rate of 5%, the impact of “fiscal drag” is pronounced. In particular by fixing allowances longer term it hugely flatters forecasts of the point when tax receipts will magically exceed revenues in a few years time, a game that has been played for such a long time it ceases to have any credibility. It also allows a “big ticket” increase just before the next election.
Tax Free Dividend Band
Reduces from £1,000 in the current tax year, to £500 from April 2024.
This was £2,000 in the 2022/23 tax year.
Tax Free CGT Allowance
Reduces from £6,000 in the current tax year, to £3,000 from April 2024.
This was £12,300 in the 2022/23 tax year, and I think will catch out a lot of people with modest share portfolios who will need to pay CGT when previously they did not.
Company Car Benefit in Kind
The BIK band for electric vehicles rises from 2% to 3% from April 2025 and by April 2026, 5%
This impacts those driving an electric company car. The benefit in kind rate is applied to the list price of the vehicle, and you and your employer are taxed on the computed benefit. Electric cars are still however a brilliant tax break, and some hybrids.
This section demonstrates where the fiscal drag is really biting, with virtually all allowances left unchanged.
Below I list some major allowances, and in brackets [date of last change, what the rate would be if it kept pace with inflation to Oct 23, and % effective reduction]
Well Hunt has made it past the 12 months mark, somewhat of an achievement beating 3 of the last 4 chancellors.
Quite frankly I am not quite sure what the point of this statement is, given the current betting odds on remaining in power at the next election, the main task seems to be some ridiculously childish statements which really do not bear any scrutiny or interest outside of the Westminster bubble. He didn’t even seem to be setting any obvious traps for Labour to fall into.
Some of his ‘announcements’ were pure theatre. He stated after a huge introduction that there would be no increase in Alcohol duties until August 2024. Which would be, er 12 months since they were raised previously. Raising them twice in a single year would be highly unusual. Similarly he announced (again, as per every year) an extension of the small business rates relief as if this was a huge tax cut.
It was pure filler, he spoke for nearly an hour and said almost nothing other than what might have been a dare of trying to mentioning as many constituencies by name as possible. Every second sentence contained a “impact in X”. It was excruciating.
Back to what he didn’t say, the main “setup” is to flatter forecasts with fiscal drag, ie not uprating allowances, and pegging down future spending so the future looks rosier than reality with ever be. Whilst tax is always a political task it just seems to have reached a nadir of cynicism that acts as a drag on the real world economy. The freezing of personal allowance thresholds for a number of years during a period of rapid inflation has allowed the “pre-election giveaways” for NI which are anything but [See Appendix 3], and fall well short of indexing those allowances as promised by Rishi in his first March 2020 budget. Indeed the 2% fall in Employee’s NI only just makes up for the lack of indexation of the personal allowance if you earn £50,000. For lower earners you are still down.
Despite these supposed tax cuts, the tax burden is still as high as it’s ever been and as per the IFS will be the highest tax raising parliament there has ever been. The tax burden has actually stayed fairly consistent through previous parliaments, in and around 33% of GDP from 2000 all the way up to 2020. By 2021 this was over 35% and over 36% by the end of 2022. The Spring budget had this forecast to be over 37% for 2023 and beyond, today’s changes made at best a 0.5% change in this, and negligible ongoing. In hairdressing terms, the UK currently has hair well over the shoulders, and this is just a few loose ends being tidied, rather than the clippers coming out as you would expect from the tone of the statements made at the dispatch box. Moreover the hair just keeps on growing and growing as inflation eats away at the static allowances.
I guess we will see if Hunt is still in the revolving chair in March.
As PS, Whilst I applaud the abolition of Class 2 NI from an administration point of view (assuming the qualifying year for state pension issue is resolved) Hunt has made several other blunders. Changing payroll mid term is just plain antagonistic to those that must administer it, but more subtly the increase in state pension by an inflation busting 8% will push some deferred state pensions over the personal tax threshold. Why does this matter? Well I understand there is no mechanism to allow state pensions to have income tax deducted from them. Those with an occupational pension can have tax collected via those, but tax payers with only a state pension are going to be somewhat challenging for HMRC to collect what is likely to be relatively small amounts of tax. I also groaned at a new consultation allowing employees to ask employers to pay into private schemes. This could mean a huge number of payments required by the employer, rather than one for all employees. It’s exactly the sort of boring defeatist nonsense the blob mentions, or would do if they had not all been given the sack.
I normally publish the following tables to give typical extraction strategies undertaken by small Limited Companies. These give the maximum director’s bonus and dividend combinations for company directors to each key “stop” point, of (a) staying basic rate; (b) preserving child benefit; and (c) loss of personal allowance at £100,000 gross income.
This is getting more complex as time goes on, so please treat this as a “loose guide” as your circumstances may of course be different.
The standard salary amount for 2023/24 will by £12,570 in most cases including one and two director companies.
|Tax Free Dividend
|Basic Rate Dividend
Increase in tax: £44 for no extra drawings.
|Tax Free Dividend
|Basic Rate Dividend
Increase in tax: £44 for no extra drawings.
|Tax Free Dividend
|Basic Rate Dividend
|Higher Rate Dividend
Increase in tax: £44 for no extra drawings.
Your gross income (dividend+salary+other income) should be:
£50,000 if you want to keep all your child benefit
£50,270 if you want to stay basic rate
£100,000 if you want to preserve all your personal allowance
£125,140 if you want to avoid the additional (45%) rate of tax
You can then use the following rules of thumb for how much tax to keep back:
|Personal Tax Arising
|Next £36,700 (to £50,270)
|8.75% (Basic Rate)
|Next £49,730 (to £100,000)
|33.75% (Higher Rate)
I have put this in again, as quite a number of company clients missed it last time around.
With the new rates of Corporation Tax, decision making about what salaries to pay and what expenses to book through your small limited company become more complex, as what used to be sensible can now become bad planning depending on your income level. The following is an attempt to summarise what will work in most situations, and I will talk to clients on an individual basis about what will work for you, typically with your year end.
The table below summarises the marginal rates of tax, combining Corporation Tax, and Dividend Taxes, at different profit levels, and if the owners are a higher or basic rate tax payer for that drawing.
|Profits of Company
|Marginal Rate of Tax, Basic Rate
|Marginal Rate of Tax, Higher Rate
|£50 to £250k
In practice, sole company directors will be Basic Rate for the first £50,000 of profit and then move to the Higher Rate once company profits reach £50,000, with the associated jump in tax rate from 26% to 51%. This is a very long way indeed from the position in 2016 with marginal rates of 20% and 40%, aimed at encouraging small business.
So What Does This Mean for Tax Planning?
For many of our clients we will be trying to keep your profits down below £50,000 by adding in as many legitimate costs as possible, and in particular trying to ensure the company pays for all the costs it can tax efficiently, rather than the individual paying for it out of their net income.
The following costs are “no brainers” for virtually all clients, regardless of income.
Good For Profits Over £50,000
if your business profits, after directors’ salaries, pensions and other sums still exceed £50,000, then may want to look at some more marginal items.
All in all this means more complexity around your small business, and inevitably higher compliance costs. Putting in a company car is fiddly, albeit worthwhile for the current tax breaks if you go electric. Some clients may well prefer to keep their business simple and chase business revenue rather than marginal tax savings.
Directors Salary Levels
This is again quite complex. Sole directors with no other employees will pay no National Insurance up to £9,100 annually, but assuming a salary of £12,570, Employers NI arises of £478.86.
Employer’s NI does not arise when you have two directors as you can claim the Employment Allowance which pays for the first £5,000 of Employers National Insurance. Similarly if you have a regular employee you may have some of the Employment Allowance remaining you can use for your own salary.
Historically, we have tended to “keep it simple” and avoid paying any Employer’s NI, even in situations where there has been a small benefit.
From April 2023, for businesses with a profit of less than £50,000 before tax, the exact benefit of paying the higher rate of Employer’s NI will vary depending on the other income of the director but will be broadly £270 per company.
If your profit is between £50,000 and £250,000 this saving increases to £567.
We consider this is enough of a saving to now recommend this as standard policy, albeit if you have other income (such as rents) using up your basic rate allowance then this may not be optimum, especially on profits under £50,000.
We will circulate notes about this later in the year and how to pay the Employers NI, where applicable.
Should I pay higher salaries still?
Short answer, no, as you will also be paying Employee’s NI of 12%. Even if you have unused Employment Allowance the benefit is negligible in most cases, albeit not all. Once your Employment Allowance is fully used up, there are no common situations when a salary will be beneficial.
Company Tax Issues in more Detail
Some of our clients like to understand what is going on in more detail, so to explain a few key points:
Why is the marginal rate of Corporation Tax 26.5% and not 25%?
Since 2014, there has been one rate of Corporation Tax for all businesses.
However from April 2023 the rate of 19% will apply only to profits of £50,000 and less, and the full rate of 25% will apply to profits over £250,000. Unlike Income Tax or SDLT, the rate is computed with a claw back, which mean Limited Companies earning between £50,000 and £250,000 will have a marginal rate of tax of 26.5%, so as to reach an average rate of 25% by the £250,000 profit level. Under the old pre 2016 system the ceiling was much higher, £300,000 for the start of the taper.
I should point out businesses which straddle the year end, so have for example a December 2023 year end, will have a hybrid rate with 9/12th at the new rate, and 3/12ths at the old, which I am not going to consider here in detail.
Isn’t the marginal rate of total taxes actually 60%? Corporation Tax + Dividend Taxes?
Not quite, as the Dividend Taxes are only paid on income already subject to Corporation Tax. So to run the numbers, for every £1,000 you make between £50,000 and £250,000 of company profits, you pay £265 in Corporation Tax. This leaves profits of £735 from which a dividend can arise. The tax on that dividend becomes £248; Leaving you with just £487. Or 51.3% in taxes.
For a basic rate tax payer, your marginal rate of tax will be 32.9%.
If I have second Company, can I have two £50,000 limits?
No, is the short answer. If you have two or more companies under common control the £50,000 band will be divided between the businesses, so you have £25,000 in each one. In some circumstances, where there is no commercial interdependence, then it will be possible for (say) a husband and wife to operate separate companies, and have their own £50,000 band, but this is quite delicate.
Should I close the company and be a Sole Trader?
The benefits of a small Limited Company are much less than they have been in the past, and we are now reluctant to incorporate new businesses with a profit before payments to owners under £50,000 as the extra costs are likely to swallow any tax savings. However there is still a broad tax advantage for small Limited Companies from £30,000 profit which peaks at around £2,500 for profits of £60,000. The main tax advantage is really one of timing, in that you can chose when to take profits and so optimise use of your tax free allowances. There can also be basic business reasons for choosing a company, such as limited liability and credibility, therefore they are not dead yet. It is interesting to note that for large earners who are looking to draw all their income, there are few tax reasons for choosing a company beyond £175,000 profit unless your income is variable.
Below is a table summarising the impact on PAYE incomes of the 2% reduction to the main rate of NI announced today.
|£50k & over
I also enclose a table modelling the real terms impact of ‘fiscal drag’ since April 2021 on income taxes and NI, had allowances and NI thresholds increased in line with inflation. This incorporates the impact of the reduction in NI announced today for those of you with PAYE income.
|Additional Income Tax
In short, the reduction to NI is still not enough to counteract the impact of ‘fiscal drag. Both lower earners and higher earners are still very much affected in real terms, although those in the middle, especially around £50k, have not been so badly hit by the impacts of inflation.