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.
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.
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.
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.
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.
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.
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.