from A newsletter for proactive planning... In this edition... NIC payable by the self-employed from April 2024 National Insurance cut for employees and directors Cash basis extended Have you used your 2023/24 dividend allowance? Capital gains tax year-end planning Tax Diary - January 2024 January 2024 Issue www.compassaccountants.co.uk
PAGE 2 NIC payable by the self-employed from April 2024 The self-employed have historically paid two classes of National Insurance – Class 2 and Class 4. However, this is set to change from April 2024 with the abolition of Class 2 National Insurance contributions. What are Class 2 contributions? The payment of Class 2 contributions has enabled a selfemployed person to build up entitlement to the state pension and contributory benefits. Class 2 contributions are flat-rate weekly contributions payable where profits from self-employment exceed the lower profits threshold, set at £12,570 for 2023/24. The threshold is aligned with the personal allowance and the lower profit limit applying for Class 4 purposes. Where profits fall between the small profits threshold (set at £6,725 for 2023/24) and the lower profits threshold, a self-employed earner is treated as having paid Class 2 contributions at a zero rate, thereby earning a qualifying year without actually having to pay any National Insurance. A self-employed earner whose profits are below the small profits threshold is not liable to pay Class 2 National Insurance contributions, but can make voluntary contributions if they choose in order to maintain their state pension record. This is a much cheaper option than paying Class 3 contributions. The abolition of Class 2 contributions has been a long time coming. Class 2 contributions were to have been abolished and Class 4 contributions reformed with effect from 6 April 2019 (having already been delayed a year). Following a U-turn, the reforms were put on hold as a result of concerns that self-employed earners with low earnings would lose out. However, the introduction of the lower profits threshold and a deemed zero rate on contributions between the small profits threshold and lower profits threshold has addressed this issue, paving the way for the abolition of Class 2 contributions. Class 4 contributions Class 4 contributions are profit-related contributions payable by self-employed earners. Contributions are payable at the main Class 4 rate on profits between the lower profits limit and the upper profits limit, and at the additional Class 4 rate on profits in excess of the upper profits limit. For 2024/25, the lower profits limit is £12,570 and the upper profits limit is £50,270, unchanged from 2023/24 and due to remain at this level until 5 April 2028. For 2024/25, the main Class 4 rate is 8%, having been reduced from 9%. The additional Class 4 rate is 2%. Building up pension entitlement for 2024/25 and beyond With the abolition of Class 2 National Insurance contributions from 6 April 2024, self-employed earners will for 2024/25 onwards build up entitlement to the state pension and contributory benefits where their earnings exceed £12,570. This is the point at which Class 4 contributions become payable. However, self-employed earners with profits between £6,725 and £12,570 for 2024/25 will receive a National Insurance credit, earning them entitlement to the state pension and contributory benefits, despite not paying any National Insurance. For 2024/25, self-employed earners with profits of less than £6,725 will still be able to make voluntary contributions at the 2023/24 Class 2 rate of £3.45 per week. This will be much cheaper than paying Class 3 voluntary contributions, which are to remain at £17.45 per week for 2024/25.
PAGE 3 National Insurance cut for employees and directors In his November 2023 Autumn Statement, the Chancellor announced a reduction in the main primary rate of Class 1 National Insurance from 12% to 10%. Rather than waiting until the start of the 2024/25 tax year to bring in the change, it applies from 6 January 2024. The change will benefit employers and directors, but will cause something of a headache for employers who will need to implement the change in-year. Primary Class 1 contributions Primary contributions are payable by employees and are the mechanism by which they build up entitlement to the state pension. For a year to be a qualifying year, an employee needs earnings at least equal to the lower earnings limit, which is set at £6,396 for 2023/24 (£123 per week). Class 1 contributions are payable at the main Class 1 rate on earnings between the primary threshold and the upper earnings limit, and at the additional rate on earnings in excess of the upper earnings limit. For 2023/24, the primary threshold is aligned with the personal allowance at £12,570 and the upper earnings limit is set at £50,270, aligned with the point at which higher rate tax becomes payable. Employees with earnings between the lower earnings limit and the primary threshold are treated as having paid primary contributions at a zero rate. This secures a qualifying year for state pension purposes for zero National Insurance cost. The main primary rate is 12% from 6 April 2023 to 5 January 2024 and 10% from 6 January 2024 to 5 April 2024. The additional primary rate is 2% throughout 2023/24. The reduction in the main primary rate will save an employee up to £62.82 per month. Directors Unlike other employees who have an earnings period that corresponds to their pay interval, directors have an annual earnings period regardless of the frequency with which they get paid. Directors’ contributions can be calculated as for PAYE on a cumulative basis by reference to the annual thresholds, or the alternative arrangements can be used under which the contributions are calculated as for other employees each time the director is paid, with the liability being recalculated on an annual basis when the director is paid for the final time in the tax year. The liability should be calculated using the rates prevailing at the time. However, where the alternative arrangements are used, the in-year change will mean that a composite annual rate for 2023/24 must be used when calculating the annual liability at the year end. For 2023/24 the composite rate is 11.5%. Giving effect to the changes Employers will need to update their payroll software before making January 2024 (month 10) payments to employees. If it is not possible to update the software in time, employers will need to rectify the position before the end of the 2023/24 tax year to ensure that employees and directors have paid the right contributions for the tax year.
PAGE 4 Cash basis extended If you are running an unincorporated business, either as a sole trader or as a partnership comprising only partners who are individuals, you can use the accruals basis to prepare your accounts or, if you are eligible, the cash basis. For 2023/24 and previous years, the cash basis is only available to traders whose turnover, computed in accordance with the cash basis rules, is £150,000 or less. However, following a consultation, the availability of the cash basis is to be extended from 6 April 2024, and from that date will be the default basis of accounts preparation for unincorporated businesses. Cash basis v accruals basis The cash basis is a simpler basis of accounts preparation. Under the cash basis, income is only recognised when received and expenses when paid. There is no need to match income and expenditure to the period to which it relates, and consequently, no need to take account of debtors and creditors, and prepayments and accruals. As income is not taken into account until it is received, relief for bad debts is automatic. Under the cash basis, capital expenditure is deducted in calculating profits unless the expenditure is of a type for which such a deduction is expressly prohibited (as is the case with land, buildings and cars). For 2023/24 and earlier tax years, the cash basis is available to traders with turnover of £150,000 or less, and those wishing to use the cash basis must elect to do so. Under the cash basis rules as they apply for these years, deductions for interest are capped at £500. There are restrictions too on the way in which losses can be used; sideways loss relief and the carry back of losses in the early years of the trade are not available where the cash basis is used. By contrast, under the accruals basis, income and expenditure must be matched to the period to which it relates, necessitating the calculation of debtors and creditors, and prepayments and accruals. Deductions for capital expenditure are not permitted, with relief instead being given in the form of capital allowances. There is no restriction on deductions for interest, and the options for relieving losses are greater than under the cash basis. The cash basis from 2024/25 From 2024/25, the turnover threshold is abolished and the cash basis becomes the default basis of accounts preparation for unincorporated businesses. The accruals basis remains available, but unincorporated businesses wishing to use the accruals basis must now opt out of the cash basis. The restrictions on interest deductions and loss relief are lifted, so traders using the cash basis are able to use losses in the same way as those using the accruals basis, and can deduct any interest and finance costs in full. Making the switch When moving between the accruals basis and the cash basis, some adjustments are necessary to ensure that all income is taxed once and relief for expenses is given once. Without adjustment, some income may be taxed twice or not at all, and some expenses may be relieved twice or not at all. For example, if a trader prepares accounts to 31 March each year and undertook work in March 2024, submitting his invoice for £5,000 on 28 March 2024, and accounts for the year to 31 March 2024 are prepared under the accruals basis, the invoice would be taken into account in calculating his 2023/24 profit. However, if the invoice was paid on 20 April 2024 and the trader used the cash basis for that year, without adjustment, the same £5,000 would also be taxed in 2024/25.
PAGE 5 Have you used your 2023/24 dividend allowance? As we move into the final months of the 2023/24 tax year, it is time to give some thought to whether you have used your 2023/24 dividend allowance yet, and whether it is worth extracting further profits as dividends before the end of the tax year. Once a salary has been taken equal to the personal allowance of £12,570, it is tax efficient to extract further profits as dividends. Nature of the dividend allowance The dividend allowance is available to all taxpayers, regardless of the rate at which they pay tax. The allowance is set at £1,000 for 2023/24, but will fall to £500 for 2024/25. Dividends sheltered by the allowance can be enjoyed free of tax by the recipient; however, as the allowance uses up part of the tax band in which the dividends fall, it is more of a zero-rate band than a true allowance. Dividend tax rates Dividends are taxed as the top slice of income and the dividend tax rates are less than the general income tax rates. Where dividends fall in the basic rate band, they are taxed at the dividend ordinary rate of 8.75%; where they fall in the higher rate band, they are taxed at the dividend upper rate of 33.75%; and where they fall in the additional rate band, they are taxed at the additional dividend rate of 39.35%. By comparison, the basic rate of income tax is 20%, the higher rate of tax is 40% and the additional rate is 45%. Restrictions on paying dividends Dividends are paid from post-tax profits which have already suffered corporation tax. A dividend can only be paid where a company has sufficient retained profits from which to pay the dividend. Further, dividends must be paid in proportion to shareholdings, although this restriction can be overcome by having an alphabet share structure which allows dividend payments to be tailored to the shareholder’s circumstances. Where this is used, each shareholder has their own class of share, e.g. A ordinary shares, B ordinary shares, and so on, meaning that a dividend can be paid to that shareholder only by declaring a dividend for the class of share that they hold. Don’t waste the allowance If you haven’t declared any dividends in 2023/24 and have the profits to do so, it is worth declaring dividends to use up your 2023/24 allowance. As the dividend allowance falls from £1,000 for 2023/24 to £500 for 2024/25, dividends that are not taxable if declared before 6 April 2024 may be taxed if declared on or after that date. In a family company scenario, check whether all shareholders have used up their dividend allowance and, if not, consider declaring dividends so that their allowances are not wasted. Options for extracting profits without triggering a personal tax liability are limited, so, where possible, it makes sense to take advantage of the tax-free extraction routes available. Remember, when assessing how much of your dividend allowance remains unused, to take account of any dividends that you have received from investments. Further dividends If you need funds outside the company and have already used your dividend and personal allowance, consider the rate at which those dividends will be taxed. If your basic rate band has not been used in full, it may be preferable to take dividends before 6 April 2024 to ensure that they are taxed at the dividend ordinary rate of 8.75%, particularly if you are likely to be a higher or additional rate taxpayer in 2024/25.
PAGE 6 Capital gains tax year-end planning No one wants to pay more tax than they need to and, where possible, disposals should be timed to ensure that the best result is achieved from a tax perspective. Where a disposal is made around the end of the tax year, accelerating or delaying the disposal date can impact on the tax that is paid. This is particularly true this year, as the capital gains tax annual exempt amount falls from £6,000 for 2023/24 to £3,000 for 2024/25. Don’t waste the exempt amount Each individual has their own annual exempt amount for capital gains tax purposes. It is set against net gains for the tax year (chargeable gains less allowable losses for the year), but before using up any capital losses from previous tax years. The annual exempt amount is lost if it is not used in the tax year – it cannot be carried forward. Spouses and civil partners are able to transfer assets between themselves. This is useful from a tax planning perspective. If one spouse or civil partner has already used their annual exempt amount and wants to dispose of an asset that would trigger a capital gain, transferring the asset, or a share in it, to the other spouse or civil partner prior to disposal will enable the unused annual exempt amount to be set against the gain. Timing considerations When considering whether it is preferable to make a disposal in 2023/24 or wait until 2024/25, it is helpful to consider the following questions: 1. 2. 3. 4. 5. 6. 7. 8. Have I used up my annual exempt amount for 2023/24? Will I be a basic rate, higher or additional rate taxpayer in 2023/24? Have I realised any losses in 2023/24? Has my spouse/civil partner used their annual exempt amount for 2023/24? What rate does my spouse or civil partner pay tax at? Do I expect to realise gains and/or losses in 2024/25? What rate do I expect to pay tax at in 2024/25? What rate do I expect my spouse or civil partner to pay tax at in 2024/25? If you have not made any disposals in 2023/24, it would be better to realise any gain before 6 April 2024 to take advantage of the higher annual exempt amount for 2023/24. Where a spouse or civil partner’s annual exempt amount is available, this can be accessed too by making a no gain/no loss transfer. Making a disposal in 2023/24 rather than 2024/25 can save a couple up to £1,200 in capital gains tax. The position is slightly more complicated if losses are involved, as allowable losses for the tax year are set against chargeable gains for the same year before applying the annual exempt amount. Unrelieved losses for earlier years are applied after the annual exempt amount. To the extent that allowable losses of the tax year are not relieved against chargeable gains of that year, they can be carried forward. If you have unrelieved losses for 2023/24 that exceed the chargeable gain, the annual exempt amount would be lost anyway, so there is nothing to be gained by making the disposal before 6 April 2024. Instead, by delaying it, you will be able to set the 2024/25 annual exempt amount against the gain before using the losses carried forward from 2023/24, reducing the overall bill. If the 2023/24 annual exempt amount has already been used up, when deciding whether to delay the disposal so that it falls in the 2024/25 tax year, it is also necessary to consider the rate at which the gain would be taxed and the overall tax bill. For example, if you are a basic rate taxpayer in 2023/24 but are likely to be a higher rate taxpayer in 2024/25, it may be better to make the disposal prior to 6 April 2024 so the gain will be taxed at 10% rather than 20% (or 18% rather than 28% where it relates to residential property), particularly if you are likely to make other gains in 2024/25 that will use up the annual exempt amount. Planning ahead is the key. Do the sums first and time the disposal accordingly.
PAGE 7 TAX DIARY JANUARY 2024 1 January 2024 – Due date for Corporation Tax due for the year ended 31 March 2023. 19 January 2024 – PAYE and NIC deductions due for month ended 5 January 2024. (If you pay your tax electronically the due date is 22 January 2024). 19 January 2024 – Filing deadline for the CIS300 monthly return for the month ended 5 January 2024. 19 January 2024 – CIS tax deducted for the month ended 5 January 2024 is payable by today. 31 January 2024 – Last day to file 2022-23 self-assessment tax returns online. 31 January 2024 – Balance of self-assessment tax owing for 2022-23 due to be settled on or before today unless you have elected to extend this deadline by formal agreement with HMRC. Also due is any first payment on account for 2023-24. For further information on any of the stories in this month’s newsletter, or for any other matter that Compass Accountants can assist you with, please contact us on 01329 844145 or contact@compassaccountants.co.uk To subscribe to the newsletter, so that each edition is delivered to your inbox, go to www.compassaccountants.co.uk and add your contact details. Compass Accountants, Venture House, The Tanneries, East Street, Titchfield Hampshire. PO14 4AR
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