The Chancellor indicated that the two-tier tax system for employees, with both National Insurance Contributions (NIC) and income taxes affecting the take home pay for 28 million workers across the country, was not something he felt was fair, as other forms of income are taxed to just income tax. He had previously indicated in his Autumn statement his wish to reduce this burden on employment, wanting to make sure that ‘work pays’, by reducing the National Insurance burden for both employees and the self-employed.
It had already been widely trailed in the past few days that there would be a further reduction in NIC of 2%, which will give working families on a salary of £35,400 (the average salary according to the Chancellor) a further tax cut of £450 per year. This is alongside the cut from the Autumn Statement of a similar amount, giving this average family £900 per year more.
However, those who are self-employed, who had only seen a 1% reduction in the rate of class 4 NIC in the Autumn Statement, will now also benefit from the full 2% reduction, benefiting two million self-employed workers.
What the Chancellor did not address is the fiscal drag issue, which continues to push many people into higher tax brackets as their wages grow, because income tax thresholds have been frozen until April 2028. In addition, the Chancellor did not change the personal allowance from £12,570, the threshold where higher rates of tax are paid of £50,271 or the additional rate threshold at £125,140, above which 45% income tax is paid, and they all remain frozen until April 2028.
What this means for those in business, is the decision about what structure is appropriate (sole trader/partnership/LLP or limited company), now needs even further detailed consideration. The rate of class 4 NIC and income tax at the lower rates, when matched with corporate tax rates and dividend taxes at 8.75%, does mean at certain levels of income the net position for the business and individuals can mean different structures are more beneficial at different levels.
Whilst the tax cuts for the employed and self-employed are to be welcomed, and the Chancellor noted that the effective personal tax rate (calculated as a combination of the NIC and income tax rates) is at its lowest level since 1975, without a change to the tax thresholds the overall tax burden will remain higher than it has for many decades.
High Income Child Benefit Charge
Introduced in January 2013, the High Income Child Benefit Charge (HICBC), has been a controversial measure throughout the past 11 years. The intention was to clawback the child benefit for those households where one earner has income over £50,000. Child Benefit is entirely removed for those who earn over £60,000. The inequity was that two earners could each receive £50,000, so £100,000 as a household but lose none of their child benefit.
The Chancellor will move to a household basis for assessing income from April 2026, although this will have some difficulties as HMRC will need to obtain information about the income for these households to determine if they qualify, which may be difficult. Therefore, in the meantime the Chancellor has decided that the simplest route is to uplift the £50,000 rate to £60,000, removing 170,000 families out of the charge altogether. Taking this further the Government will now remove the child benefit at a slower rate. Previously, 1% of the child benefit was lost for every £100 of income over £50,000. Therefore, for those earning above £60,000, the child benefit was entirely lost. From April 24 this will also move to 1% for every £200 of income over £60,000, meaning it will be lost by the time your income reaches £80,000.
HMRC Debt and Collection Management
The Government has committed to investing a further £140m to improve HMRC’s ability to manage tax debts and tax collection. It is anticipated that these extra resources will raise £4.3 billion over the next five years. Therefore, to achieve these figures we fully expect HMRC to continue to use its powers to focus on compliance review into individuals and businesses alike.
The threat of increased compliance visits by HMRC can be a disruption to businesses and their owners. HMRC will soon have data from the likes of Uber, Etsy and others and will no doubt be looking at how it can ensure that these small businesses are paying their share of the tax burden. Taking advice if you are aware of any non-disclosure as soon as possible is a must to avoid hefty penalties.
Replacing Non-Domicile Tax Status
The Chancellor intends to abolish the current regime, which sees non-domestic individuals pay a charge starting at £30,000 when they have been UK residents for more than seven years. Such individuals only pay UK tax on income from UK sources, and would not pay UK tax on their foreign income and assets unless they remit them to the UK.
From 6 April 2025, the above rules will be replaced with a new residence-based regime. Initially, non-doms who become UK residents will not pay UK tax on any foreign income and gains arising in their first four years of tax residence, provided they have been a non-UK tax resident for the last 10 years. Thereby shortening the time afforded to non-doms when they enter the UK. After this period all non-doms will be subject to UK tax on their worldwide income.
There will be the following transitional arrangements for existing UK-domiciled individuals claiming the remittance basis:
an option to rebase the value of capital assets to 5 April 2019
a temporary 50% exemption for the taxation of foreign income for the first year of the new regime (2025-26)
a two-year Temporary Repatriation Facility to allow individuals to bring previously accrued foreign income and gains into the UK at a 12% rate of tax.
Anyone affected will need to ensure that they have reviewed their tax position both in terms of the UK assets and also their worldwide assets to understand the impact of these changes.
Domicile and Inheritance Tax
An individual’s domicile status also has a large bearing on their Inheritance Tax (IHT) positions and the Government has also announced its intention to move to a residence-based approach for IHT. However, it will continue to consult on this policy and has confirmed that there will not be any changes to the IHT regime before 6 April 2025.
Watch our Spring Budget Analysis Webinar to hear what experts from our tax, financial services and accounting teams thought about the changes announced and how they could impact you and your business.
