UK Tax News

Optimal 2025/26 salary for contractor companies

Published: 01 May 2025

Updated: 01 May 2025

Written by Ray Coman

The reduction in the secondary threshold from £9,100 to £5,000, from 6 April 2025 has had an impact of contractor companies.  Most companies that are set up for the purpose of providing services for the self-employed consist of just one director.  A company with one director will not entitled to the employment allowance.

Changes from 2025/26

Husband wife or multiple director companies

Paying employees over £5,000 to preserve employment allowance

Scenario calculation

Our service

Changes from 2025/26

For contractor companies consisting of only one director, the reduction in employment allowance means that a further £4,100 of director’s salary is subject to national insurance.  According to the calculation, illustrated I the table below a salary of £12,570 is still optimal.  It requires a separate payment of tax through PAYE which introduces a minor administrative burden.  The lower earnings threshold has stay about the same level of the preceding year.  The level of £6,500 for 2025/26 is the earnings at which social security benefits accrue.  Significantly, enring of £6,500 or higher in 2025/26 add a year toward the number required to secure a basic state pension.

Husband wife or multiple director companies

The employment allowance is not sacrificed where more than one person is a director even if the company consists only of directors.  The most common form of multiple director contractor company occurs where husband and wife are both directors.  The requirement is that one director is not the only person liable to employer’s national insurance (but for the employment allowance.)  Therefore, if there are only two directors (for instance a married couple) and both are paid over the second national insurance threshold; the company will be eligible for employment allowance.

Paying employees over £5,000 to preserve employment allowance

It is also worth noting that if the company has employees (who are not directors) at least one of the employees would have to earn over the secondary threshold of the employment allowance to be restored.  There is therefore an tax incentive to pay an employee at least this amount.

Scenario calculation

With the employer's national insurance Income tax is payable on almost all forms income with exception of tax free income

Our service

At Coman&Co the director’s salary is processed as a March bonus.  This reduces the number of PAYE payments throughout the year to just one and thereby reduces the hassle associated with the optimal salary and dividend for a contractor company.  We have lengthy experience providing compliance service to small business and self-employed individuals including the many that choose to operate via limited company.  We provide a full support service and ensure that it is adjusted according to changing rules to maintain tax efficiency for our clients.  Please contact us for a free, initial meeting

Spring statement 2025

Published: 29 Mar 2025

Updated: 29 Mar 2025

Written by Ray Coman

The Spring Statement did not deliver any significant tax changes, focusing instead on welfare reform and toughening of tax enforcement.

Self-employment late payment penalties will be harder starting from next week

Consultation into cash ISAs

New quarterly reporting obligations from April 2026

High Income Benefit Charge to be collectable through PAYE

How Coman&Co can help

Self-employment late payment penalties will be harder starting from next week

Making tax digital for income tax and VAT requires sole traders and landlords to keep digital record and submit a quarterly report of income and expenses to HMRC.

Currently, taxpayers are charged a penalty equal to 2% of any tax unpaid on day 16 after the filing deadline and a further 2% penalty on any amount outstanding on day 31 after the filing deadline.

From April 2025, the penalty will increase to 3% for amounts between 15 days and 29 days late and a further 3% levied on any amounts still unpaid 30 days after the due date for tax.

Any tax unpaid 31 days after the due date will be subject to a further penalty.

A further penalty will start 31 days after the due date.  This is not a fixed penalty but a daily penalty.  The interest rate is 4% per annum, but it will be increasing to 10% per annum from April 2025.

As a reminder, the filing and payment deadline for VAT is one calendar month and seven days after the end of the VAT period.  (In practice a direct debit collects the VAT three working days after the payment deadline.)

In this example, VAT for the period ended 31 May 2025 is due by 7^th July 2025.  If £10,000 is still unpaid two months later by the 7^th September, the penalty would be £200 levied on 23^th July, a further £200 on 7^th August.  Between 8^th August and 7 September there are 31 days.  The day-rate penalty based on 10% applied to £10,000 is £85.  The total penalty would therefore be £485.

Consultation into cash ISAs

The government is considering a cut to the yearly allowance for a cash ISA from £20,000 to £4,000.  This is set to direct more investment into equities.  This remains at a consultation phase presently.

New quarterly reporting obligations from April 2026

Most self-employed individuals and landlords will be required to comply with Making Tax Digital for Income Tax from April 2026.  Any landlords or sole traders with income of £50,000 or more will be required to comply from April 2026.  This threshold will decrease to £30,000 in April 2027 and again to £20,000 in April 2028.  The reporting threshold is assessed on combined rental profits and self-employment profits for individuals with both activities.

Taxpayers who are required to submit residency and remittance pages of the Tax Return will not be required to join MTD for income tax until April 2027 regardless of income.  This grace period will benefit mostly non-resident landlords.

High Income Benefit Charge to be collectable through PAYE

From 2025/26, it will be possible to pay High Income Benefit Charge through the PAYE code.  The implication is that families will not need to register for self-assessment if Child Benefit is the only reason for needing to file a Tax Return.

How Coman&Co can help

We can assist our clients with quarterly reporting of profits.  At the time of writing our fee is £40 plus VAT per quarter for assisting with the MTD requirement.  Given that this would result in reduced calculation work at the year end, our MTD clients will enjoy a £40 discount on year end tax return fees.  The fee includes up to 10 transactions per quarter and any further bookkeeping would be charged at 50 pence per entry.

For clients who would like to be able to track income and expenses, we can assist with software selection.  Coman&Co resells QuickBooks at discounted price.

Budget October 2024

Published: 30 Oct 2024

Updated: 17 Nov 2024

Written by Ray Coman

The first Labour Budget in 14 years, and the first by a female chancellor, has been far reaching in scope.  A wide variety of measures have significantly increased the tax burden for employers, business, investors, employees and the deceased.  This report set out the key national insurance, income tax, capital gains and inheritance tax implications.

Increase in the rate of capital gains tax

Reduction in business assets disposal relief

Employers to start pay more National Insurance

Employment allowance to increase

Pension funds to become subject to inheritance tax

A new cap to apply to business property and agricultural property relief

Threshold for inheritance tax exemption to be frozen

Freezing of allowances

Stamp duty to increase

Business rates relief to be reduced

Other measures

Summary

Increase in the rate of capital gains tax

The rate of capital gains tax for assets other than non-residential property is 20% to the extent that income and gains exceed the higher rate tax threshold.  Otherwise, gains are taxed at 10%.  With effect from today, 30 October 2024, the rates will be increased to 18% and 24% respectively.  This will bring the rate of capital gains for all assets in line with the rate that has applied since 6 April 2024 for disposals of residential property.

Reduction in business assets disposal relief

Tax relief applies to gains on the disposal of a whole business or significant (i.e. 5%) shareholding in an unquoted trading company.  This tax break, known as Business Assets Disposal Relief, brings the rate of capital gains tax down to 10%.  Taking effect to disposals made from 6 April 2025 the rate will be increased to 14% and again to 18% for disposal made on or after 6 April 2026.

Employers to start pay more National Insurance

The rate of employer’s national insurance will be increased by 1.25 to 15% with effect from 2025/26.  Introduced at the same time, the Secondary Threshold, which is the threshold at which employer become liable to national insurance will be reduce from £9,100 to £5,000 from the same date.

Employment allowance to increase

The initial amount of employer’s national insurance is exempt by mechanism of the Employment Allowance.  The first £5,000 of employer’s national insurance is exempted through the allowance.  This threshold will increase to £10,500 from 6 April 2025.  The fixed allowance to which each employer is entitled to once, is especially beneficial to small businesses employers.

Pension funds to become subject to inheritance tax

From 6 April 2027, pension pots will become part of the taxable estate.  So much of the inheritance tax as relates to the pension will be payable by the pension administrator direct to HMRC.  For instance, if an estate has £1.225m in property and £100k in pension, the first £325 would be exempt because of the nil rate band.  The remaining £1m would be taxable and £40,000 would be paid by the pension administrator.

The income tax regulation of pensions will remain unchanged.  By way of recap, flexible drawdown pensions can be transferred to a beneficiary exempt from inheritance tax.  If the pension has been used to purchase an annuity, the annuity payments stop on death of the pension holder.

If the pension holder dies before 75, beneficiaries will not have to pay tax on withdrawals (subject to a Lifetime Allowance charges.)  If the pension is transferred after the deceased had reached 75, withdrawals would be subject to income tax.

A new cap to apply to business property and agricultural property relief

The transfer of a business assets or of farmland held by an estate is currently exempt from inheritance tax.  The government will limit the value of combined business and agricultural assets that can be transferred tax free to £1 million.  50% of the value of qualifying business and agricultural property over £1 million will be added to the taxable estate.

The rate of inheritance tax relief for shares on an unrecognised stock exchanged (such as the AIM) will be reduced from 100% to 50%.  Unlike other business property, the £1 million exemption will not be applicable to AIM shares.  By way of recap it is necessary to hold business and agricultural assets for two years for the relief to apply.

Threshold for inheritance tax exemption to be frozen

The nil rate band refers to the value above which a person’s estate is subject to inheritance tax.  It is currently set at £325,000 person and there is an additional £500,000 on residential property.  The inheritance tax threshold will also be frozen until 2030.  The nil rate band threshold has not changed since 2009 and its value has significantly eroded as a consequence of inflation (a process known as fiscal drag.)

Freezing of allowances

The personal allowance, higher rate tax band and other fixed personal tax threshold are set to be fixed until 2028.  The value of a set, tax-free limit diminishes in line with inflation, and therefore the freezing of an allowance has the effect of increasing tax revenue of a government over time.  The ISA allowance will be fixed at £20,000 until 2030.  The allowance represents the amount that can be invested in a specified saving and/or share dealing account each year.  Income and gains from an ISA are not subject to tax.

Stamp duty to increase

The rate of stamp duty on the purchase of a second residential property will increase from 3% to 5%.  SDLT for purchases by companies on dwellings worth more than £500,000 will increase from 15% to 17% with effect from the same date.  SDLT changes will come into effect for transactions concluded on or after 31 October 2024 (tomorrow.)

Business rates relief to be reduced

For business in retail, leisure and hospitality, business rates relief will fall from 75% to 40% from 1 April 2025.

The current reduction in business rates will end on 31 March 2025 following the announcement in today’s Budget.

Other measures

Carried interest is a form of performance related reward for hedge fund managers. This is set to increase from 28% to 32%.

Vat is set to be introduced on private school fees from January 2025.

Energy profits tax, which is a form of windfall tax on companies in the oil and gas industry, will increase to 38% until March 2030.

The minimum wage will increase by 6.7% to £12.21 per hour for workers aged 21 or older. For workers between 18 and 20 the minimum wage will increase to £10 an hour.

Summary

The expected £40 billion in tax increases from the 2024 Budget has resulted in being the most severe since 1993.  The increase in in employer’s national insurance from April 2025 is predicted to raise the lion’s share of £25 billion in revenue.

The recent succession of Budget tax rises, freezing of allowance and abolition of tax relief will have a cumulative effect on the UK economy.

2024 Budget

Published: 06 Mar 2024

Updated: 06 Mar 2024

Written by Ray Coman

Last attempt of the Tories to recover popularity before the election, the Budget included a generous national insurance rate cut for basic rate taxpayers while targeting wealthier individuals through abolition of furnished holiday lettings regime and non-dom tax concessions.

Further cut to main rate of employee’s national insurance contributions

National insurance reduction for the self-employed

Reduction in High Income Benefit Charge

Scrapping of non-domiciled tax concession

Capital gains tax on residential property to reduce

British ISA

VAT threshold to rise

Furnished holiday letting regime to be abolished

Summary

Further cut to main rate of employee’s national insurance contributions

The employee national insurance rate is to be cur by 2 pence in the pound starting 6 April 2024.  This cut follows a similar cut in the Autum statement of the rate from 12% to 10%.  When combined with the NI cut in November a taxpayer on £50,270 or higher will save £1,508 a year, as a result.  The cut affects the rate between the primary threshold (of £12,570) and the Upper earnings limit (of £50,270 per year.)  There are no further savings for employees or directors with an income over the upper threshold.

National insurance reduction for the self-employed

The rate of sole trader national insurance rate between the Lower and upper Profits Threshold also reduced from 8% to 6%.  This mirrors the cut given to employees and will save sole traders and partners in a partnership about £650.  The cut increases the tax benefit of working an unincorporated business (or LLP) as compared with operating as a company.

Income tax rates and thresholds remain the same

Despite inflation falling from 10% last year, the rate is still about 4%.  This means that the real terms value of fixed thresholds such as the personal allowance and higher rate tax band are being eroded over time.  The process by which inflation reduces the value of fixed allowances is referred to as fiscal drag and it is estimated to cause the current tax burden on the UK taxpayer to be the highest in history.

Reduction in High Income Benefit Charge

The High Income Benefit Charge is the threshold at which child benefit needs to be pad back through a self-assessment Tax return.  Currently set at £50,000, the threshold is due to increase £10,000 to £60,000 from April.  Child benefit is available to parents with children under 16 or under 20 if in full time higher education.

The rate of tapering is also halved.  Currently, the amount of Child Benefit to repaid increases at a rate of 1% for every £100 that income exceeds the threshold.  Therefore, the amount to pay back is equal to the benefit received when income reaches £60,000.

From April 2024, the charge is equal to 1% of benefit received for every £200 that income exceeds the threshold.  Consequently, HIBC is equal to child benefit received when income reaches £80,000.  The benefit clawback is assessed on whichever partner has the higher income.  As of next month, child benefit will be £25.60 per week for the first child and £16.95 per week for subsequent children.

Scrapping of non-domiciled tax concession

Currently a person who is ‘domiciled’ outside the UK can claim the remittance basis on overseas income and wealth.  The measure is designed so that wealthy foreign nationals (who have the potential to contribute towards the UK economy and support the sterling currency) are not deterred from migrating to the UK.

The length of time during which the remittance basis can be claimed is currently 15 years, although a remittance basis charge makes it ineffective for the majority of non-doms after just 7 years.  Mr Hunt announced that a new simpler system will apply based on residency will allow the concession to apply to overseas income and gains for the first four years of residency only.

Capital gains tax on residential property to reduce

The rate of tax applied to gains on disposal of residential property will reduce from 28% to 24% with effect from April 2024.  Currently, a person’s home is exempt from tax. Residential real estate which is not being occupied by the owner is however subject to capital gains tax.

British ISA

In addition to the ISA- currently set at £20,000 per annum-, savers will be able to contribute up to £5,000 starting 2024/25 into a fund invested exclusively in British companies.

VAT threshold to rise

Long overdue the VAT threshold will be rising from 1 April 224 from £85,000 to £90,000.  The Vat threshold has been fixed at 85,000 since April 2017, and has not kept pace with inflation since.  However, the most recent increase will be welcomed by small businesses and the self-employed who can reduce red tape and stay more competitive by remaining unregistered for VAT.

Furnished holiday letting regime to be abolished

The current regime allows investment property that is let to short term to benefit from preferential rates.  In particular, a full deduction from mortgage interest against profits is allowed.  The sale of a furnished holiday let can benefit from business asset disposal relief, which is 10% and considerably lower that the rate of capital gains tax applied to other types of residential property.  Staring April 2024, landlords will no longer be able to treat their property as FHL and most properties will be treated the same as other types of buy-to-let.  The aim is to make more long-term rental accommodation available in holiday spots.  The Budget also included an abolition of Multiple Dwellings Relief (from stamp duty land tax) available to landlords of multiple properties.

Summary

As the final Budget before the election, and the Tories lagging in the polls, a raft of tax cuts were inevitable.  The tax concessions were enabled by continuing drops in inflation which is expected to reach 2% in the coming months.  Fiscal drag continues to be the hidden method of funding the fiscal changes, with changes to non-dom legislation making a smaller contribution.

2023 Autumn Statement

Published: 22 Nov 2023

Updated: 22 Nov 2023

Written by Ray Coman

Since the Spring Budget, falling inflation has given the chancellor more scope to promote growth through tax cuts.  The most significant change was made to national insurance which applies to income from work (employment earnings and self-employment profits) as applied to all individuals between 16 and state pension age, which is usually 68.  Incentives for the working population were complemented by tougher access to Jobseekers’ Allowance benefit.

Employee’s National Insurance rate to drop

Class 2 to be abolished

Drop in the rate of class 4 NIC

Minimum Wage to rise

Annual allowance to be fixed permanent at £1 million per annum

Commentary and criticism

Employee’s National Insurance rate to drop

The highest rate of employee’s national insurance applies on earnings between the Primary Threshold (currently £12,570) and the upper earnings threshold (currently £50,270.)  That Class 1 NIC will be cut from 12% to 10% starting from 6 January 2024.  While the tax cut will benefit all employees earning over £12,570, it will have the greatest impact in percentage terms on those whose income is nonetheless beneath £50,270.

The combined income tax and NIC rate for an employee (with income over the personal allowance) is 30%.  This is the lowest rate since the 1980s and is intended to reward work.

Class 2 to be abolished

Ensuring that self-employed workers are not left out by the National Insurance cut, The Chancellor also announced an abolition of Class 2 NIC.  The measure amounts to an annual tax saving £192 for a self-employer worker with profits over £12,570 a year.  The current rate of class 2 NIC is £3.45 a week.

It will continue to be possible to opt into obtaining national insurance credit (towards the state pension) provided profits are over the the Small Profits Threshold of £6,725.

Drop in the rate of class 4 NIC

The rate of class 4 NIC, which applies to income between £12,570 and £50,270 will also be cut from its current level of 9% to 8% starting April 2024. The NI cut further tips the balance in favour of sole trader over limited company status for the self-employed.

Minimum Wage to rise

The Minimum Wage (which the government increasing refer to as the National Living Wage) will increase to £11.44 from April 2024.  The age threshold for entitlement to the Minimum Wage will at the same time lower from 23 to 21 years old.

Benefits will increase with inflation (as measured by CPI) and the State pension will rise in line with the Triple Lock system.  The 8.5% annual hike is tagged to earnings rather than CPI as a measure of inflation.

Annual allowance to be fixed permanent at £1 million per annum

The annual investment allowance permits the cost of plant and machinery to be deducted in full against taxable profits in the tax year in which the expense occurs.  Plant and machinery covers: computer equipment, office fixtures and furniture, specialist equipment and intangible assts such as patent rights.  Unlike many other types of business expense, this type of item can last in a business for several years, and is therefore referred to as an asset.

Without an annual investment allowance only a portion of the cost can be deducted from profits each year.  The system (which still applies to motor vehicles) is referred to as a capital allowance.  Full expensing accelerates the rate at which tax relief is obtain on a business’s’ longer term investment in its growth.

Previously, in the Spring 2023 Budget, full expensing of asset expenditure had been set to last three years starting 1 April 2023.  The announcement made in today’s statement will make that provision permanent.

Commentary and criticism

The opposition were keen to point out that because none of the thresholds have increased in line with inflation, the overall tax burden had increased significantly under the current government.  The tax giveaway achieved through a cut in national insurance in no way compensates for the rising tax bill caused by fiscal drag.  Tax as a percentage of GDP is at historical highs.

The Office for Budget Responsibility have estimated that by 2028/29, nearly three million more people will pay tax at the higher rate and a further £400k at the additional rate because of thresholds being frozen despite the continued rise in inflation.  Conservatives are still lagging Labour in the polls and with an election set for next year.

Despite rumours in the approach to the Autumn Statement, no cuts were made to inheritance tax.