OVERVIEW

The Chancellor announced changes to NI for both the employed and self-employed. However, the effective date of the changes are different.

6 January 2024

From this date, the Primary Class 1 main rate will be cut from 12% to 10%. As with the mid-year changes we saw in 2022/23, this will require updates to payroll software so it will be important to ensure these have been facilitated before running the January payroll. Note that the rate for earnings above the Upper Threshold will remain 2%.

The change will mean a similar hybrid rate is likely to apply to directors due to their annual earnings period - though we cannot confirm this until more information is published. If the same logic is used as previously, the main rate will be 9/12 x 12% + 3/12 x 10% = 11.5%. However, as the payment thresholds have not changed, profit extraction strategies involving a small salary topped up with dividends will not be affected.

 

6 April 2024

From this date, compulsory Class 2 NI contributions (the fixed rate paid by the self-employed) will be abolished altogether. Those with profits between £6,725 and £12,570 will continue to get access to contributory benefits including the state pension through a NI credit without paying NI contributions as they do currently. It will still be able to be possible to pay Class 2 voluntarily, i.e. for those with profits below the small profits threshold who wish to accumulate contributory benefits. Additionally, the main rate of Class 4 NI will be cut from 9% to 8%.

The beneficial NI incentive for recruiting veterans has been extended until 2025.

 

Cash basis expanded

Another welcome announcement is that the cash basis for self-employed businesses preparing accounts will no longer be subject to a turnover limit – previously they would have to switch to the accruals basis once turnover exceeded £300,000. Additionally, businesses using the cash basis will no longer be subject to restrictions for deductions for interest payments or using losses, meaning they will be able to use sideways loss relief. These changes will be effective from 6 April 2024 - the first year that the tax year basis applies.

 

Summary of other changes

In a welcome announcement, the sunset clauses for the enterprise investment scheme (EIS) and venture capital trust (VCT) scheme will both be extended for ten years. They were due to end in 2025 but will now continue until at least 2035.

Full expensing is to be made permanent. Initially introduced for a three-year period, this allows unlimited relief for qualifying capital expenditure by way of giving a first year allowance of either 100% or 50%.

The two research and development schemes will be merged so that, for accounting periods commencing on or after 1 April, SMEs and large companies will receive relief in the same way. There will also be enhanced support for SMEs that are “R&D intensive”.

The van benefit charge and fuel charge, and the car fuel multiplier have been frozen for 2024/25.

The tax reliefs available in qualifying Freeports and Investment Zones are generous. The qualifying window for each will be extended to ten years (originally five).

 

PRACTICAL IMPLICATIONS OF KEY CHANGES

Employees

The savings for employees is easy to demonstrate. Before the change, the position would be:

 

	Per annum (£)	Per month (£)
Salary	50,270	4,189
Tax	7,540	628
NI	4,524	377
In-pocket	38,206	3,184

 

From January the NI rate cut will take effect, and the position will be as follows:

 

	Per annum (£)	Per month (£)
Salary	50,270	4,189
Tax	7,540	628
NI	3,770	314
In-pocket	38,960	3,247

 

So the maximum saving is approximately £750 per year. This will be lower for 2023/24, as the rate cut will only apply to 3/12 months.

 

Directors

At the time of writing, very little technical information is available on how the in-year rate change will be implemented. However, if we assume that it will be the same as the changes in 2022/23, those with annual earnings periods, i.e. directors, will need to apply a hybrid rate. This would be 11.5%.

 

Owner managers

Does the rate cut affect profit extraction strategy? The answer will depend on what your strategy entails. If you restrict your salary to no more than £12,570 then top up with dividends, the change will have no effect on you at all, as your earnings will be below the primary threshold anyway.

Where directors or senior managers might be affected is where there is no scope to take a dividend, perhaps because they are not also shareholders, and a bonus is required instead. This could also apply where there aren’t enough accumulated profits to pay a dividend to an owner manager. The rate cut will make the overall cost of paying a bonus slightly cheaper than previously.

In principle, you can withdraw as much profit by way of bonus as you want. It’s counted as part of your total pay and there’s no upper limit to this. 

Obviously, the larger the bonus the more tax you will pay, as your total income for the year will be higher. So the level of your bonus is important if you prefer not to pay too much tax.

The money paid as a bonus can often be taken out of the company in a different form. If a large bonus is extracted from the company, there will be less money available to reward directors in other, possibly more tax-efficient, ways.

In terms of planning, ensuring the tax point for any bonus paid in 2023/24 falls after 6 January will save employees’ NI.

Don’t forget the company has to pay employers’ NI on your bonus at the rate of 13.8%. For example, assuming the secondary (employers’) earnings threshold for NI (£9,100 for 2023/24) has been exceeded by salary and the NI employment allowance is either not available or has already been used up, a £10,000 bonus means the company has another £1,380 (13.8% x £10,000) to pay out in employers’ NI.

Remember, if the employee is already a higher rate taxpayer, the bonus will be charged to NI at 2% so there will be no saving. But if the employee is a basic rate taxpayer, the rate cut will have an effect. As an example, consider a basic rate taxpayer. The bonus to be paid is £15,000 out of taxable company profits of £300,000. Prior to 6 January the position will be as follows:

Company’s tax position
2023/24	£	£	CT payable
Taxable profit in the company before deduction of bonus		300,000	75,000
Gross bonus withdrawn	15,000
Employers’ NI at 13.8%	2,070
Total cost of bonus		17,070
Net profit after bonus		282,930	70,733
CT saved by paying bonus			4,267
Net cost to the company (costs less CT saved)	12,802
Net cost as a percentage of the gross bonus		85.4%

 

Employee tax position
2023/24	£	£	%
Gross bonus		15,000	100%
Income tax (at 20% on £15,000)	3,000
Employees’ NI at 12%	1,800
Total taxes paid		4,800	32%
Net bonus available to spend		10,200	68%

 

If the company delays payment of the bonus until after 6 January, there is no difference to the company position. But there would be a saving for the employee:

Employee tax position
2023/24 – after 6 January	£	£	%
Gross bonus		15,000	100%
Income tax (at 20% on £15,000)	3,000
Employees’ NI at 10%	1,500
Total taxes paid		4,500	30%
Net bonus available to spend		10,500	70%

 

Here, the saving is £300. Note that if some of the bonus was taxable at the higher 40% tax band, only part of it would be subject to NI at the main rate, so the saving would be less.

 

Incorporation

In our view, the change will have no material impact on a decision to incorporate a business. Firstly, a tax-motivated incorporation is likely to be paired with a profit extraction salary that minimises NI anyway. Secondly, there will also be a cut to NI for the self-employed from 6 April 2024.

 

Self-employed individuals

The abolition of compulsory Class 2 NI from April 2024 will save a self-employed person just under £180 per year. They will continue to accumulate entitlement to contributory benefits, such as the state pension, as long as they either:

• Have self-employed profits exceeding the small profits threshold (£6,725); or
• Have profits below the threshold, but elect to pay Class 2 voluntarily.

The cut in Class 4’s main rate will apply to profits that fall into the basic rate income tax band, in a similar way to how the Class 1 rate cut applies. The additional rate that applies to profits above £50,270 remains at 2%.

This does mean that if there are Class 4 losses carrying forward, tax relief will now be given at 8% instead of 9%.

 

Cash basis expansion

One further change to look at is the expansion of the cash basis. This will align the options for loss relief with those available under the accruals basis – crucially meaning those using the cash basis will be able to use sideways loss relief. This may speed up relief for traders that suffer losses, as they will now be able to choose whether to offset the loss against other income in the same, or previous, tax years.

The expansion will take place from 2024/25 onwards. What is not currently clear is whether or not losses calculated using the cash basis for 2024/25 will be able to offset general income in 2023/24. This won’t be apparent until the Autumn Finance Bill is published.

The summary of all announcements can be found here.