Spring Budget – What It Means to You

7 March 2024

In yesterday’s Spring Budget, Chancellor Jeremy Hunt announced a number of tax changes and new initiatives to boost the UK economy.

But what will the Budget mean in practice? As a business owner, will it help or hinder you?

Here we summarise what the Budget means for you.

It was a noisy House of Commons that heard confirmation of several widely trailed measures on National Insurance, Non-Dom tax status and Furnished Holiday Lettings rules. There were also measures intended to promote efficiency and productivity in the public sector, including the NHS, Police and Courts Service. There were also a few less anticipated changes, including to the Child Benefit rules, and the VAT registration threshold.

Thresholds

For many taxes, the threshold at which they become payable or increase has been either frozen (for example the personal allowance for income tax) or reduced (the dividend tax allowance) in recent years. With the impact of inflation, this means that even if your income keeps up with the cost of living, the proportion of your income that is taken in tax has been increasing. This is part of the picture making up ‘fiscal drag’, which many feel contributes to a lack of growth in the economy. After today’s Budget, this position remains.

Income tax and national insurance

The rate of income tax is unchanged this year after a reduction in the threshold for the additional rate of tax to £125,140 was brought in last April. It’s worth noting that because national insurance is paid by fewer people than income tax (in particular, Pensioners don’t pay NIC) a cut in national insurance costs the Government less than a cut to income tax. This was no doubt part of the decision-making process for Jeremy Hunt, leading to the main headline measure in today’s Budget – a reduction in national insurance rates.

Employee national insurance was reduced in January 2024 by two percent from 12% to 10%. The Chancellor announced a further two per cent cut from 6th April 2024, so that the main rate paid by workers falls to 8%. This will reduce the amount deducted annually for those on an average salary (around £35k) by around £444 per annum. Those on the median salary (around £28k) will save £308 per year. A similar reduction was announced for the self-employed (in their case, from 8% to 6% from April).

This money will be gratefully received by many of course. Some others will point out that along with fiscal drag, the recent cost of living impacts may negate the benefit of the cut in taxes on earnings. For directors of their own limited companies, the National Insurance change will make no difference as most of them take only the personal allowance, or less, in PAYE income. In some cases, it will make sense to re-examine how you take money from your business to ensure that a balancing act of variable corporation tax rates, other personal income and individual circumstances haven’t meant that a change of strategy is a good idea for you.

Finally, the marginal rate of income tax increases dramatically over £100k of income, due to the withdrawal at this level of the personal allowance. This punishing system, which can generate tax rates of over 60%, was not amended in today’s Budget, and should still be planned for where possible.

Child benefit rules

The High Income Child Benefit Charge has long been held to be an unfair piece of legislation. In simple terms when two parents claim Child Benefit, if one of them earns over £50k, some of the benefit is clawed back. If one of them earns over £60k, all the benefit is clawed back. This means that if one household has two people earning £40k per year each, the benefit is not clawed back at all, whereas if another has just one earner on £60k, no benefit can be kept.

The Chancellor announced that there are long-term plans to allow HMRC to collect data and base Child Benefit reclaims on household, rather than individual income, to make the system fairer, but this fundamental change will take time and is targeted for 2026. In the meantime, he has increased the lower threshold for losing the benefit from £50k to £60k, and the upper limit from £60k to £80k.

Dividend taxes

The amount of dividends which can be received tax-free is scheduled to reduce in April 2024 from £1,000 to £500, and this remains the case. The rates of tax on dividend income remain unchanged.

Corporation tax

The rate of corporation tax increased for many companies in April 2023, from a maximum of 19% to a variable rate from 19% up to 25%. This rate is still reasonably low by international standards, but the increase was significant. There were no changes to this announced today.

VAT

The threshold at which a business needs to register for VAT has remained at £85k per annum for several years, despite inflation. It’s long been accepted that this causes a ‘cliff edge’ where a disproportionate number of businesses declare turnover of just under this level. The Chancellor announced that on the 1st of April 2024 the threshold moves to £90k per annum. In other respects, VAT has been left unchanged, so if you’re already registered and trading, this measure will have no meaningful effect whatsoever.

Capital Gains Tax

Many business owners quite reasonably have half an eye on what rate of tax they might pay if they were able to sell their companies at some point in the future. Business Asset Disposal Relief and, previous to that, Entrepreneur’s Relief, used to allow up to £10m of gains in a lifetime to benefit from a 10% tax rate (subject of course to a number of conditions). This value has been brought down in recent years to £1m per person. The Government left this unchanged today.

The annual exemption for gains, which for most people will only apply when assets like shares or a personally held second property are sold, is still scheduled to reduce from £6k to £3k on the 6th April 2024. If you have a portfolio of shares with unrealised gains (they’ve increased in value but you’ve not sold them) then a transaction before the new tax year might be sensible (do take individual advice here, circumstances vary).

The big news on Capital Gains tax only affects those who are selling a second property. The main rates of capital gains tax are usually 10% for income falling into the basic rate band (after allowing for your other income and annual allowance) and 20% above that. For personally held property, the rates until today were 18% and 28%.  Jeremy Hunt announced that the upper rate will fall from 28% to 24% in April 2024.

This means that if you are selling a second, personally held property with a large gain after the rules change, you’ll be paying 4% less tax than the same transaction would’ve cost last week (rules on timing will apply).

‘Non-Dom’ Status

The much discussed Non-Domiciled tax status, which benefits some people living in the UK but who have not chosen to officially ‘domicile’ here, is to be abolished. Instead, the concept of domicile is to be consigned to history. Instead, more transparent rules, requiring anyone who is UK resident to pay tax on all income (UK and overseas) four years after arriving here will be introduced.

Furnished holiday lets

If you invest personally in property, the Furnished Holiday Letting system (FHL) allowed owners to get better tax relief on mortgage costs if the properties were used for holiday lettings, rather than traditional renting. As a result, there is concern that in some areas, renters cannot find properties because the owners are disadvantaged if they rent their property in that way. As a result, the FHL regime is to be abolished in 2025, which can be hoped to remove this motivating factor.

Savings and ISAs

A British ISA, allowing for additional investments in British business (of £5k per annum) is to be launched. This is additional to the existing ISA allowance.

HMRC and the law

Mr Hunt has allocated a new package of funds for HMRC to spend collecting additional tax, which he expects to raise an additional £4.5bn. More details on this will follow. We will examine the details on this when they emerge, as to what enforcement and investigation measures will be included. In the Budget’s ‘Red Book’, the Government has reiterated their commitment to talking non-compliance in the umbrella company market, saying they will set out next steps ‘shortly’.

In summary

The biggest news in this Budget (a 2% drop in NIC) was widely shared long before the Chancellor made his announcements. There will be continued arguments over whether it’s brave or reckless to cut tax (which we are now all accepting includes National Insurance) when the economy is struggling. But for the owners of small and growing businesses, today’s announcements will make little difference to their day-to-day activity.

For those with plans to grow and hopefully sell in future, the lack of changes to Capital Gains Tax are welcome. A new Government may take a serious look at CGT in due course, but for now, the message is ‘business as usual’.

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