Key Tax Planning Updates for the Coming Tax Year
Five key tax planning considerations for small business owners, limited companies, and employers as an outcome of the recent Autumn Statement announcement.
1. Employers - Change to the National Living Wage
If you have employees on payroll who are aged between 16 to 21, there are some changes to the National Living Wage (NMW), including 21 and 22 year olds who are now captured in the legal changes and will get a pay rise of 12.37% or £1.26 per hour, from 1st April 2024. In the current tax year, employees age 23 and over are entitled to the NMW.
The revised NMW rates are noted below:
Adults (Aged 21+): from £10.42 to £11.44 from 1st April 2024
Age 18-20: from £7.49 to £8.60 from 1st April 2024
Aged 16-17: from £5.28 to £6.40 from 1st April 2024
Apprentice rate: £5.28 to £6.40 from 1st April 2024
The NMW apprenticeship rate has also increased by 21.2%.
As an employer, you need to review your employees details and budget for these extra cost.
2. Employers - Change to Employee National Insurance Contributions
On 6 January 2024, the Employee National Insurance Contributions Primary Class 1 rate will drop from 12% to 10% on employees’ earnings between £12,570 and £50,270.
It is important that your payroll software is updated and the changes take effect from January payroll.
3. The Self Employed
There were three significant updates for the self employed at the Autumn Statement this month.
The first is the cut of National Insurance Contributions (NICs) Class 4 from 9% to 8%. Class 4 NICs are chargeble on self employed profits up to £50,270. The change will take effect from the new tax year, 6th April 2024. Profits above this level will continue to be levied at 2%.
Secondly, the Chancellor also announced that Class 2 NICs will also be abolished from 6th April 2024. The self-employed pay this annually on their tax return, along with the Class 4 NICs, and it is Class 2 NICs that go towards your state pension credit. The good news is that as a self-employed individual, you still retain your state pension credit after Class 2 NICs are abolished.
Thirdly, most self-employed people work on a cash basis, which means you only declare income received, or expenses made, in the tax year in question. So, if for example, an invoice is issued at the end of the tax year to a client, but cash is not received till the start of the new tax year, then this income would be declared when the funds are actually received in your bank account, so for this example, in the new tax year. This clearly is a good approach as you do not want to be taxed on income you have not received.
The Chancellor confirmed that from the new tax year, 2024/25, all self-employed individuals and business owners should work on a cash basis. Currently, if your turnover is over £150,000, you would need to report on an accrual basis versus cash basis, which means you must report and pay tax on any invoices you create, even if client is late paying. This can impact cash flow and require careful accounting procedures in place to keep track of income and expenses.
4. Directors and Profit Extraction
The dividend allowance, or tax-free profit extraction in a tax year, will reduce from £1,000 to £500 per shareholder from the new tax year, 6th April 2024.
It is important to consider profit extraction before this date to make use of the current £1,000 dividend allowance.
The dividend tax rate above the tax-free allowance is 8.75%, up to profits of £50,270.
5. Company cars
For limited company directors, buying a new electric car through the business has been a tax efficient tool, available to employees and/or directors. The tax benefits include the cost of the car itself and running expenses being run through the business with 100% tax relief, and there has been very little Benefit in Kind (BIK) - or personal tax charge use - levied on your personal tax return.
The BIK has been slowly creeping up over the last few year and is currently 2%, still very tax efficient. This will increase to 3% from 2025/26 and then 5% from 2027/2028.
This could mean a review of ownership of the electric car and whether it is worth changing to personal ownership versus business. This will depend on the list price of the car as well as the running cost of the car.
5. Selling assets, including your business
If you are considering selling up or indeed selling any asset worth more than £6,000 in the next year, the capital gains tax (CGT) tax free allowance will be cut from £6,000 to £3,000 from 6th April 2024.
When it comes to selling your business, you may also qualify for Business Asset Disposal (BAD) Relief, previously known as Entrepreneurs Relief. Currently, you can enjoy a reduced CGT rate of 10% versus the usual 20% on any gains up to £1 million for each shareholder.
