In light of the Autumn Statement 2023 we take a look at changes for self-employed workers as the Chancellor announces the ‘largest ever cut’ to self-employed National Insurance.
National Insurance Contributions
The Autumn Statement announced a number of measures affecting the self-employed, the headline being a reduction of Class 4 national insurance from 9% to 8% from April 2024, together with the abolishing of Class 2 national insurance which is currently £3.45 a week, paid by self-employed people earning more than £12,570. These savings are, however, offset to some extent by the continued freezing of NIC thresholds that were announced in previous Budgets, and have been in place for some time.
NI changes are confirmed to take effect in April 2024 and this decrease in national insurance contributions, the Chancellor stated, could save some as much as £350 per year (based on an average self-employed profit of £28,200).
Despite Class 2 NICs being abolished, the self-employed will continue to receive access to state benefits such as state pension through a ‘National Insurance credit’. State pension was confirmed to rise 8.5% to £221.20 per week from April 2024, as the triple lock was confirmed – this being an increase of £902 a year to total £11,500 of state pension.
The Autumn Statement 2023 did not go as far as a full reversal of the off payroll working (“IR35”) rules that some had anticipated. It did however announce measures to counter over collection of tax, and provide some administrative simplification, where an incorrect determination is discovered by HMRC. This is likely to provide some comfort to medium and large “client” businesses, many of whom, two years into the regime, are still grappling with its application.
Following the consultation launched in April 2023, the legislation will take effect from April 2024 to enable HMRC to reduce PAYE liability of an employer; the framework we will see in due course to detail just how these changes will work.
Other announcements for the self-employed
- There is also an expansion to the cash basis, which is seen as a simplified way of calculating taxable profits when compared to the traditional accrual’s basis. Legislation is to be introduced to expand the cash basis from April 2024, and will make the cash basis the default method for small businesses.
- The Autumn Statement also announced further tweaks to Making Tax Digital (MTD) for income tax, which remains on the horizon as a major change to how the self-employed report their income and expenses to HMRC. Further details are to be published on this “later in 2023”.
- Finally, it is stated that HMRC will ‘rewrite guidance’ around the tax deductibility of training costs, to provide more clarity to businesses on what costs are deductible. The stated aim is to ensure confidence that updating existing skills or maintaining pace with technology advances, or changes in industry practices are allowable costs when calculating taxable profit. More details are to follow on this from HMRC in due course.
Will the self-employed benefit from these changes?
Michael Morter, Price Bailey Tax Director and private tax specialist, shares his final thoughts on the Autumn Statement 2023.
Overall the Autumn Statement announced more changes affecting the self-employed than was first anticipated.
The 1% cut to the main rate of National Insurance contributions (NIC) on profits, and the removal of Class 2 NI, will represent a tax saving when they are introduced in April 2024.
It is widely recognised that the impact of “fiscal drag”, whereby tax thresholds have been frozen and many unchanged since 2021/22 with planned increases ahead coupled with high inflation, has meant that real terms take home profits are likely to decline. However, the reduction in NIC rates present something in the right direction.
The changes to IR35, the expansion of the cash basis, and the promise of increased clarity on training costs, all point towards an attempt to simplify the tax system for the self-employed. This is likely to be with MTD in mind as HMRC try to align a complex tax system with their desire to digitise record keeping for the self-employed, with the purported aim of reducing errors in the reporting of income and expenses.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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