How to encourage investment and growth by reducing the level of taxation on one hand?
How to not increase the budget deficit so as to ensure markets don't fret about the state of the UK's balance sheet?
The announcements were delivered against a backdrop in which theUK is heavily indebted. Many other countries across the world are as well, but unfunded policy declarations from the 2022 mini budget put the UK's finances under scrutiny and led to a bond crisis.
The government have somewhat shored up the public finances since then mainly through tax rises. It's meant the policy emphasis is primarily focussed on reducing inflation and eventually, the national debt. Whilst the headlines from this statement revolved around reductions to National Insurance and generous business investment relief, the underlying tax benefits are perhaps not as pronounced as the Chancellor would make out to be the case!
The Income Tax allowance and National Insurance thresholds remain frozen until 2028, as do the other tax bands. Rising wages and earnings mean many people are likely to then enter higher tax rates. This increases their tax exposure and the likely amount they will have to pay.
Hunt's latest policies simply result in people now paying a little less in additional tax than was expected prior to the statement. The reality is the tax burden will continue to rise for the next 5 years to reach a post-war high of 38% of GDP! The UK may have avoided a recession so far, but the economy has been stagnant. Meaningful future growth may yet be hard to come by.
In this post we summarise what was announced and the likely impact it will have on your finances:
The big headline announcement from the Chancellor was that the main rate of Class 1 Primary National Insurance Contributions (NICs) will be cut from 12% to 10% as of 6 January 2024 for employees. This will come at a reported cost to the government of £9bn. The measure is said to mean that the average worker earning £35,400 will achieve an annual NIC saving of £450. Of note, there is no change to the upper earnings Class 1 Primary NIC rate of 2%.
The Chancellor also announced that Class 2 National Insurance Contributions will be abolished entirely. This he claimed will save the self-employed £182 per year. If you're self-employed and your profits are under £6,725 or if you pay voluntary class 2 NIC, you will continue to be able to do so.
The main rate of Class 4 National Insurance Contributions will be reduced from 9% to 8% from April 2024. This is paid on profits between £12,570 and £50,270. Again, Hunt claimed such measures would save 2m people around £350 per year. This doesn't impact the Class 4 upper rate of 2%.
The NIC Lower Earnings Limit for the employed and Small Profits Thresholds for the self-employed are frozen at their current levels for the 2024/25 tax year. There is also an extension to the deadline for paying voluntary NIC for the tax years between 6 April 2006 and 5 April 2018, to 5 April 2025.
The policies mark the 3rd change to NIC in 3 years!
2. Enterprise Investment Scheme & Venture Capital Trust
The Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) income tax relief were due to end on 6 April 2025, known as the sunset clause. They have been extended by 10 years to 6 April 2035.
EIS is designed to encourage investors to fund small businesses through the provision of various tax breaks for projects considered high risk in nature. The announcement will be welcomed by individual investors and the owner managers of small companies seeking external funding.
The state pension triple lock has been retained and will rise by 8.5% for the 2024/25 tax year. This is in line with average earnings growth.
The government are also looking into a lifetime provider model for pensions whereby instead of the employer choosing a pension scheme, the employee can nominate where they want their pension contributions to go. The idea being this would reduce the number of pension pots a person could end up with when they change employment.
It potentially shifts the onus of running a pension from employers to employees which could help focus minds on an important savings tool. However, it would create an increased administrative burden on employers who have to contribute to a greater number of pensions for their workforce.
4. The Living Wage increase
Prior to the Autumn Statement announcement, it was confirmed the National Living Wage (NLW) will rise to £11.44 per hour in April 2024. Whilst welcome news to many, this is not funded by the government and is likely to put cost pressures on many businesses payrolls.
Given such costs could be passed on to the consumer, or end user, this may prove inflationary. It was also announced that the age threshold will also be lowered from 23 to 21 years old.
5. Research & Development tax relief
Both R&D tax relief schemes, SME and RDEC, will be merged into one single scheme for all claimant companies. The idea behind this is to simplify the rules, and also reduce the cost of administering it.
It will impact accounting periods beginning on, or after, 1 April 2024. As part of this, the notional RDEC credit will be reduced from 25% to 19%. The expectation is that the new merged scheme will be more akin to RDEC than SME in nature.
R&D intensive loss-making SME'
s will see the R&D spend threshold reduced from 40% of total spend to 30%.
6. Full expensing
Full expensing for capital expenditure will be a permanent measure as of 1 April 2026. This scheme means UK companies can potentially deduct the entire cost of their new capital equipment purchases from their profits in the year they make such investments.
Capital equipment includes plant machinery, lorries, tractors, technology, and furniture, among other items. How beneficial this is to small businesses is questionable however, because it's only relevant for companies who spend in excess of £1m a year on qualifying capital items, given the availability of the Annual Investment Allowance.
The Annual Investment Allowancemeans companies can in effect already fully expense qualifying expenditure up to £1m. Therefore, this measure is likely to only be of real benefit to larger companies.
7. Business rates
The existing 75% discount for business rates up to £110,000 for retail, hospitality, and leisure organisations will be extended for another year until 2025. It's claimed this will save the average pub £12,800.
The small business rates multiplier will be frozen at 49.39p for 2024/25 and it was claimed this will protect 1m ratepayers. This is the 4th consecutive year it has been frozen.
However, the standard multiplier will increase in line with September CPI inflation to 54.6p. Many small businesses in the hospitality trade operate from larger, standard rated premises.
Hunt acknowledged that such measures were temporary and would therefore have to come to an end. This would suggest reform of the business rates system is needed to make it fairer for pubs, bars, and restaurants who operate in a very challenging trading environment.
8. Self-employed standard accounting process
If you're a self-employed trader, you will now be able to pay tax on the cash basis of accounting. This means you will pay tax based on the net cash you've received. This is as opposed to the more complicated accounting accruals basis, whereby you business is taxed on profits showing in your accounts which can be different to your cash profits.
The cash basis of accounting has previously been limited to only the smallest businesses. This change should mean more self-employed traders benefit from a lighter administrative burden. However, this may require a change to accounting practices and systems which will likely incur additional initial costs.
Of note, the cash basis for calculating profits will be the default basis, however traders can elect to still calculate the profits under the accruals basis.
9. Late payments
Not for the first time the Chancellor condemned late payment practices that are often used by large corporates trading with SMEs. Whilst small businesses need to implement credit control systems to maintain a tight grip of their cash position, evidently more needs to be done to combat this issue and ensure SMEs are paid on time.
Late payment by corporates in effect uses SMEs as a form of free credit and Hunt stated he wants to drive out the worst payers from receiving government contracts. The issue for SMEs is that a healthy cashflow can help increase the amount of working capital these businesses can put to use in terms of future investment to fund growth.
Bad payment practices need to be driven out to ensure SMEs, which form the backbone of the UK economy, can help drive the Chancellor's growth agenda. Hunt claimed the government would look to take more action on this matter.
10. Alcohol duties
Alcohol duty will be frozen until 1 August 2024. This applies to beer, wine, cider, and spirits.
Tobacco duty is increasing by 2% above the Retail Prices Index inflation rate and the duty on hand-rolling tobacco will rise by an additional 10%, to 12% above RPI inflation. This will take effect from 6pm on 22 November 2023.
The content of this post was created on 23/11/2023 and updated on 28/11/2023. Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.