When we set out to predict what would be in this Budget, the main expectations were a slight reduction in the main rates of National Insurance and the probable abolition of the remittance basis of taxation for non-domiciled individuals. No changes to other taxes had been trailed, however, we pointed out that chancellors do like to surprise the electorate and no more so than when a general election looms.
Budget Announcements Made as Expected
National Insurance for employers and employees
The main rate of Primary Class 1 National Insurance, that paid by employees, will fall from 6 April 2024 from 10% to 8%.
What does it mean? This combined NIC reduction means that someone with employment income of, say, £50,000 will pay £1,497 less NICs in 2024/25 than if the rate had remained at 12%. Or, to look at it another way, their monthly pay packet will increase by almost £125.
For employers there have been no changes to the rate or thresholds for employer’s Class 1 NICs, which remains at 13.8% for wages paid in excess of £9,100 a year (£175 per week). For eligible employers, the employment allowance remains at £5,000 per year, reducing their total employer’s NIC liability by this sum.
Good news it seems but the effect of fiscal drag again bites because the Chancellor has frozen the personal allowance and income tax bands for a further year despite annual pay inflation to December 2023 running at over 5%. So he gives with one hand and takes with the other…
National Insurance for the self-employed
Self-employed individuals with profits of more than £12,570 a year pay two types of NIC: Class 2 and Class 4. Two key changes come into effect from 6 April 2024.
The main rate of Class 4 NICs will be cut from 9% to 6% in 2024/25. Class 4 NICs will continue to be calculated at 2% on profits over £50,270.
Class 2 NICs will effectively be abolished, saving £179.40 per annum.
What does it mean? This NIC reduction means that a sole trader with, say, trade profits of £50,000 will pay £1,302 less NICs in 2024/25 than will be due for the 2023/24 tax year. Just be aware that this saving may not be felt until the 2024/25 self-assessment balancing payment is made on or before 31 January 2026.
Entitlement to state benefits including the state pension
If you are self-employed, your Class 2 NIC payments have ensured you accrue entitlement to a range of state benefits, including the state pension. If your profits exceed £6,725 in 2024/25 you will continue to accrue entitlement to state benefits despite not paying Class 2 NICs. If your profits are less than £6,725, or you make a loss, you may need to pay Class 2 NICs on a voluntary basis to maintain your state benefit entitlement.
Child Benefit
Perhaps more helpful for families is the news that the higher income child benefit charge is to be reformed. The income threshold for child benefit being clawed back is being raised from £50,000 for any one adult in the household to £60,000 from 6 April 2024. The Chancellor has also reduced the clawback rate so that this spreads over £20,000 of income above the threshold rather than £10,000.
A further promised reform is a switch to assessing this across total household income. This is to avoid the distortion that a single-adult household earning over £60,000 in 2024/25 is subject to a claw back but two parents with income of £59,000 each (total household income of £118,000) would not be.
UK Residency and domicile
The UK has long standing arrangements that recognise the concept of domicile in the tax system. Domicile is the idea that a person has an overarching connection to a particular country. This could be where they are born and intend to return to in the future (domicile of origin) or where they have decided to go for the rest of their lives (domicile of choice).
For people resident in the UK but domiciled elsewhere (so called “non-doms”) there is an election that can be made to not be taxed in the UK on your overseas income and gains so long as the associated money is not brought into or otherwise “enjoyed” in the UK. There are hefty charges that kick in if you claim this status for more than seven of the previous nine tax years and you automatically become domiciled in the UK (deemed domicile) if you remain for 15 of the previous 20 tax years.
The Chancellor has proposed a sweeping change, to ditch the entire concept of domicile and replace it with an automatic entitlement to not pay tax on overseas income and gains for the first four years of UK tax residency so long as you have not been previously UK resident in the preceding ten tax years. During that four year window you will be at liberty to bring overseas income and gains into the UK with no tax charge.
This is expected to yield more than £2bn once the system is in place, however, much of that may well be a rush of income tax from people coming onshore together with their overseas assets during the four year initial period. When that period expires it is unclear if people will stay and suffer UK tax on their worldwide income and gains!
The system has been of use to both wealthy professionals such as bankers and footballers wanting to work in the UK temporarily, and also to globally mobile ultra-high net worth individuals wanting to spend time in the UK despite having their main wealth base overseas.
This is hugely complex area and there will be transitionary arrangements for existing non-doms as well as planning considerations for people considering moving to UK to take up residency. The above is only an outline of the policy as it stands and if you are potentially impacted by this you should seek bespoke advice from us.
The Surprises
CGT and Furnished Holiday Lets
There were some unexpected changes in Capital Gains Tax (CGT) on residential property and the abolition of the furnished holiday lets (FHLs) regime.
Properties not covered by the Principal Private Residence exemption from CGT were previously subject to a tax rate of 28% for higher rate taxayers but this is being reduced to 24% from 6 April 2024 although the Chancellor has not altered the basic rate of 18%. This rate affects properties held for a variety of purposes including but not limited to, buy to let, properties occupied by relatives, holiday homes and empty properties. One wonders if the reason for this change is to make the change on FHLs easier to swallow.
In contrast to this, the news that the tax privileged status of FHLs is to be abolished is going to be less welcomed. Holiday accommodation which meets the FHL criteria is currently treated more like a trading business than a buy to let investment and as such there is full income tax relief on mortgage finance and CGT on gains potentially as low as 10%. The abolition of FHLs in tax law will push the rate of CGT up to 24% and will restrict income tax relief on mortgage interest in line with buy to let properties. There will also be a less generous tax regime for plant and equipment purchased for the letting business.
Stamp Duty Land Tax
Multiple Dwellings Relief (MDR) is a relief currently available when buying two or more dwellings in a single transaction or series of linked transactions.
MDR is to be abolished for purchases of residential property in England and Northern Ireland with an effective date on or after 1 June 2024.
VAT
From 1 April 2024, the VAT registration threshold and deregistration thresholds will each increase by £5,000 to £90,000 and £88,000 respectively. The thresholds had previously been frozen at £85,000 and £83,000 since 1 April 2017. There have been no changes to the rates of VAT and the standard rate continues to be set at 20%.
Overall one can’t help but feel that unless you are a non-dom or an FHL owner, this was a Budget tinkering around the edges and very much with an eye on the General Election. No doubt whatever happens at the next election there could be much bigger changes on the way for 2025.
About the author
Pete Heslington is a Chartered Tax Advisor (CTA) and Trusts and Estates Practitioner (TEP).
Pete’s expertise crosses many sectors and taxes. He focuses on bespoke tax planning and structuring covering corporate tax, mergers and demergers, acquisitions and sales, exit and remuneration planning, share schemes, partnership taxation, investment planning, wills and probate.
