- HMRC, Insights, Pensions, Tax
There has been a lot of speculation in recent weeks regarding the announcements the Chancellor could make, in what could possibly be his last Statement before the next general election. How far would Mr Hunt go to tackle domestic issues such as inflation, the cost of living burden, promote business growth and innovation, tackle mounting national debt, improve public services, and appease voters?
We take a look at some of yesterday’s key announcements for you and your business:
Class 1 National Insurance Contributions – Employees
A headline announcement, from 6th January 2024, Class 1 National Insurance Contributions (NIC) will reduce from 12% to 10%.
For employees, this means an increase to net pay of between £168 (basic rate taxpayer/national minimum wage) and £750 per year (higher rate taxpayer/upper earnings limit).
Thresholds were frozen, so NIC still becomes payable at 10% from £12,570 and, more welcome, for higher earnings, the 2% NIC rate continues at £50,270.
Class 2 and 4 national insurance contributions – Self-Employed
Class 2 national insurance contributions are to be abolished (without affecting entitlement to the State Pension), meaning the average self-employed person should benefit by £192 a year.
In addition, the Class 4 NICs rate has been reduced by 1% for profits between £12,570 and £50,270, providing a further benefit of up to £377 per year.
These measures should reduce the tax motivation to incorporate a business, by reducing the tax differential between self-employment and operating through a corporate vehicle.
As National Insurance is a reserved power, the changes will apply throughout the UK so Scottish taxpayers will also be able to benefit from these measures.
As a concept, the Chancellor proposes to introduce a ‘worker’s choice’ approach to pensions, where employees can instruct their employer on where they wish their pension contributions to be paid. This should reduce the scenario of holding multiple separate pensions, which many individuals currently accumulate particularly early in the career journey when job changes may be more frequent. The announcement opens a consultation period and it is likely that any implementing any change will fall to the next government. .
On the surface, the concept of a “pension for life” seems attractive. Especially for those who have spent time and fees consolidating a career’s worth of pension funds.
There is also the potential that these super-sized funds could provide economies of scale for savers, either in the form of lower pension costs or wider investment opportunities. And they could boost financial literacy and engagement by being simpler and more convenient to access and understand.
The interaction of auto-enrolment and the new pensions for life could potentially increase costs and investment complexity for investors, not to mention the undertaking involved for employers. This will need very careful consideration for both businesses and individuals before changes are formally introduced..
The government announced that it will honour the triple lock, ensuring that the state pension rises in line with CPI inflation, average wage growth, or 2.5%. From April 2024, the State Pension and Pension Credit is due to rise by 8.5%, meaning an additional £17.35 for many in retirement, and a maximum annual state pension of £11,541.90.
With no changes to the personal allowance of £12,570, it is worth noting the narrower differential and consider whether this has an impact on your own personal tax situation, if any.
The devil is always in the detail and the Chancellor’s full Autumn Statement provides some clarity over how pensions will be taxed from April 2024.
Those who previously inherited funds from loved ones who died pre-75 received welcomed news that they could continue to access these funds tax-free.
Additionally, proposed changes in the tax treatment of beneficiary pension funds will no longer take place.
Despite much speculation in the lead-up to the Autumn Statement, the Chancellor did not make changes to Inheritance Tax (IHT).
With the IHT threshold, rates, reliefs and allowances unchanged and property and asset values up, thousands of estates will still be swept into paying IHT, some unexpectedly. We recommend checking your estate to see if it will be liable and if so, put in place plans to make use of allowances, the seven-year rule, or trusts to efficiently pass down wealth.
From April 2024, saving into the tax-free environment of an ISA is set to become easier as a number of changes take effect:
From April 2024, the National Living Wage (NLW) rate (the highest rate of National Minimum Wage) is set to increase from £10.42 to £11.44 per hour, an increase of 9.78% as recommended by the Low Pay Commission. This is the largest ever increase to the minimum wage in cash terms worth over £1,800 (before any other interactions or adjustments) for a full-time worker and sees the government consider that it has fulfilled its pledge to end low pay.
Eligibility for the NLW will also be extended to 21-year-olds and over, that’s a 12.4% increase and worth almost £2,300 for a full-time worker again before any other interactions or adjustments).
The National Minimum Wage rates for younger workers will also increase; 18–20-year-olds will receive a 14.8% increase from £7.49 to £8.60 and those aged 16-17, and apprentices, will see an increase from £5.28 to £6.40 – that’s a 21.2% increase.
A small victory for women in the UK – VAT will no longer be charged on period pants/reusable period underwear, as the VAT treatment of these products is brought into line with other women’s sanitary products.
This means that these essential items for women and girls are VAT-free, bringing environmentally-friendly sanitary products in line with the existing tax policy on disposable products.
In 2021, Scotland became the first country in the world to introduce free period products so that any woman or girl has access to essential items (including disposable or reusable items) whenever she needs them.
Class 1 National Insurance Contributions
There was no announcement regarding changes to Employer Class 1 NICs, so the rate remains at at 13.8% payable when an employee earns more than £9,100 per year (pro-rated for the relevant pay periods).
However, with pay rises likely given the national minimum wage increases from January 2024, NICs payments for businesses are likely to rise until such time as the threshold is increased.
There were some other employment tax changes which were included in the written statement, particularly relating to off payroll working and the Construction Industry Scheme. If you are an employer and would like to understand more about how these changes may affect you, please don’t hesitate to contact us – we would be very pleased to discuss this in more detail to suit your particular situation and whether you may be impacted.
Making Tax Digital (MTD) is one of the most significant changes to the tax system since the introduction of self-assessment. Under the new scheme, from 2026 any VAT-registered businesses (including sole traders, limited companies, partnerships, charitable trusts, and landlords with at least one UK property) will be required to keep their business records in a digital format and make quarterly submissions to HMRC.
In an effort to make it easier to comply with the new requirements, a set of improvements to MTD was announced, such as exempting some taxpayers from MTD altogether (for example, those who do not have national insurance numbers), and enabling taxpayers to be represented by more than one agent.
Mr Hunt also announced an extension to the cash basis method of calculating taxable profits for self-employed individuals and trading partnerships, and the restrictions that apply to the deduction of interest costs will also be removed.
Whilst the increase to the national minimum wage is a welcome boost for workers, employers will be faced with some major challenges from increased employment costs, managing pay increases and maintaining pay differentials, increased pension contributions (given higher pensionable pay at play) to more scrutiny and controls needed to maintain minimum wage compliance remains in line with the complex rules and regulations, to improving and implementing reward strategies to attract new talent and retain existing employees.
A key announcement on VAT law concerns how VAT and excise tax should be interpreted in the wake of the Retained EU Law (Revocation and Reform) Act 2023 (REUL Act)..
The measure confirms that it will no longer be possible for any part of any UK Act of Parliament or domestic subordinate legislation to be quashed or disapplied on the basis that it was incompatible with EU law.
It also ensures that UK VAT and excise legislation continues to be interpreted as Parliament intended, drawing on rights and principles that currently apply in interpreting UK law.
More generally the government has announced that VAT relief for energy-saving materials will be extended with the intention that this will allow the VAT relief to keep pace with technological changes, such as the introduction of new products. The announcement specifically mentioned water source heat pumps. UK VAT law has often been criticised for failing to keep up with changes in technology, for example, the VAT rate on paper books compared to e-books was litigated, so this is a positive move if the relief can support a more dynamic approach to VAT.
A consultation will be launched in 2024 regarding the Uber case which concerns contractual obligations of principals and agents. Additionally despite not making any changes to the retail VAT export scheme and the associated airside scheme (tax-free shopping), the government will continue to accept representations on this area.
Hospitality has been helped by a temporary alcohol duty freeze until August 2024, meaning no increase to duty on beer, cider, wine or spirits.
But this is likely to be offset by significant additional staff costs due to the increase in the national living wage next April.
The Chancellor confirmed that he would extend 75 per cent rates relief for another year for the retail, hospitality, and leisure industries and freeze the small business rate relief multiplier, but the standard business multiplier will increase by 6.4%.
The Chancellor announced that the earlier temporary capital allowances scheme will now be made permanent – a welcome move for businesses after the removal of super-deduction relief and increase to the rate of corporation tax, and giving the certainty to go ahead and spend.
Full expensing relief allows companies to claim 100% capital allowances on qualifying plant and machinery (including IT equipment) in the year of purchase.
The Chancellor had limited room for manoeuvre in his Autumn Statement. High levels of government indebtedness, a historically high tax burden on the UK population and the need to keep Conservative voters on side left the Chancellor walking a thin line.
The Chancellor made a number of small-scale announcements, aimed at getting more people into work, helping with long-term illnesses, upskilling the workforce, and improving productivity. For businesses, the biggest announcement was that full expensing of capital spending would be made permanent.
For individuals, the headline announcement was a reduction in National Insurance (NIC) by 2% from 12% to 10%, effective from 6 January 2024.
The effect on certain businesses will be significant, particularly for investment-intensive sectors. Looking at listed equities, share prices of certain sectors have quickly adjusted upwards as this information has been absorbed. BT, a bellwether capital-intensive business in the UK, has risen by more than 5% on this news.
For the UK economy more broadly, and UK asset prices by extension, there should be some cheer that the consumer has been supported through National Insurance cuts and pension uplifts but the scale of the support may not have been enough to “move the dial”.
Consumers in the UK have been under significant pressure as inflation has risen sharply over the last two years, and this is reflected in the very poor performance of more domestically-focused UK mid-cap companies compared to their large-cap peers which today’s announcement alone will not be enough to reverse.
For investors deciding whether now is the time to increase their exposure to domestic UK businesses via listed mid and small-cap companies they ought to be cautious of the lack of international investor flows into the UK with a compelling reason to invest in UK business still lacking.
The most significant details for investors came in the form of the economic updates; the changes in the OBR expectations, the forecast for the UK economy to experience anaemic economic growth. The OBR upgraded 2023 growth and downgraded growth expectations for future years. As already mentioned, there is no catalyst for investors to head into UK risk assets but government bonds could see inflows.
The improved growth forecast for 2023 and the higher tax revenues should reduce the need for HM Treasury to tap the bond market for funding, reducing bond issuance and supporting government bond prices. The low growth prospects also recommend bond investment in the UK as the line between a stagnant economy and one in recession is fine, so if risk-off sentiment were to grip UK assets then this would also see more money flowing into bonds. The UK’s falling inflation prospects further support this thinking.
In summary, the announcements may not spell an immediate push for investors into UK equities but the prospects for UK fixed-income investments seem solid, as long as inflation remains under control.
Tax and legislation is complex and should always be considered carefully, talking all your details into account.
To talk with us about your financial planning, tax or estate planning questions or needs, please don’t hesitate to contact us. We are delighted to help.
Content on this page is provided for general information and is subject to change and does not constitute advice.
If you would like to know more for your own situation, please do not hesitate to contact us.
We would be delighted to discuss this with you in more detail, taking your circumstances into account.