What was the point? winning an election? Or Looking after you me and the future?
Well hold your horses and be patient, because one needs to understand what the government is trying to influence, with what tools, and whether are you on the right side of the political divide?.
Putting this in a little context, as the economy, and inflation are stated are the government's top priority. how does this statement fit with the plan?

What are they dealing with?
We know that economies had gotten used to “just in time” shipments that allow you to receive the things you buy from the far east faster than coal from Newcastle and that Covid disrupted all that and made most things significantly more expensive. Add in the Russian sanctions on energy and the Ukraine war and there’s been substantial further increase in costs since then. Now, the events in Gaza present further risks to supplies and possibly fuel.
More costs going in a restricted supply chain means squeezed profits and then increased prices. Simple someone has to pay. A big component of cost prices are wages, and they have been responding to rising essential costs. 7.7% in the last three months although only 1.4% annually more if you discount price increases.
Orthodox theory assumes those wages will be spent generally competing for products which will drive up prices further in demand-led inflation. I.e. pulling prices up as buyers compete for short stocks rather than costs pushing prices up.
Hence the perceived spectre of inflation.

What tools do they have?
The key point here is that governments, particularly conservative ones, can’t really control product shortages that drive cost inflation. They don’t have or want the tools. So changes take time to work out. They equally can’t say they are not in control..Whilst the Government had flooded the market with covid support to avoid an economic meltdown when it stood still in 2020 to 2021 and that did feed some surplus cash into  “locked down” consumers saving on their commute, many normal workers suffered hardship. Amazon and Zoom did very well as did others moving into the virtual reality world. Not so what’s left of the high street.
In 2021, Liz Truss came up with the kamikaze giveaway budget bonanza to get richer people to spend more and grow the economy out of trouble.

To cries of “we don’t know what you’re doing” that spooked the financial markets as they couldn’t see how it would all be paid for, sending interest rates spiralling and adding to financial pressure on you and I.
Orthodox theory, dictates that if you can't control the supply of goods, one reduces prices by squeezing consumers to force them to stop competing for goods and services by keeping interest rates high and not giving too many tax breaks.  So we have a relatively Dark Friday Autumn statement
They aren’t giving much away to business this time, but with a looming election, and a battering in the polls means they are trying to give some treats to working people voters and the politically favourable pensioner class. 

Will that work for you?
Business thrives on customers being confident to spend with you because their customers will buy from them or they themselves have the cash. Is that what we see now? Yes for some and no for some.The ONS statistics to October 23 show some key stats for business to consider 2/3rd of adults are spending less on non-essentials because of the rising cost of living.
Although the wealthy are still spending on every expensive items. Retail sales dropped to the lowest level since February 21 when lockdown restrictions were in place.48% of customers are shopping around more for savings than they used to Automotive fuel sales have dropped to March 21 levels as more work and buy from home and fewer products circulate
So eventually forcing customers out of the market sends the  trend too far the other way and we have recession.  Maybe not technically with the multi billion flagship projects still going on but certainly for most small business.
So who was your customer, where are they now?  And what and how are you selling to them? It’s all changing. 

Back to the central point. Is there something in Santa’s sack for you?
Let's start with some headlines Joy for the masses!

From January 24, employees earning over £12,570 pa will pay 2% less national insurance to boost their net pay by up to £750 a year.  

For those driving company cars and vans, the private use benefit charges remain the same so cheaper in real terms.
As employers, your costs are going up. 

National Living Wage (NLW) will rise by 9.8% from £10.42 to £11.44, an increase of £1.02.thats a total pay of £23,795.20 pa on an average 2080 hour year or 40hours per week.  . In addition. one has to factor in Employers National Insurance at 13.8% on all pay over £9100 pa so  that’s an extra £293 pa and then there’s extra auto- enrolment costs at 5% being £107 so the extra cost to the business pa, per head, is a minimum of £2479 pa . A tidy sum on a significant element of your costs.

In case you’re confused. If you are under 23 and at least of school leaving age, you will earn the national minimum wage according to your age group. If you are over 23, you will earn the national living wage.

For those of you particularly in hospitality or using temporary youngsters 21 and 22 year olds are now entitled to this adult rate.

Another extra admin cost is likely to be the new right of workers to demand employers pay their auto-enrolment pensions into the scheme of their choice not the employers scheme.

The self-employed will pay 1% less from April because that’s more tricky to administer. The irritating relic of fixed rate class 2 NIC contributions ( the old stamp for those of you old enough)  that was meant to contribute to their benefits is binned. Those earning less than £6725 can pay voluntary NI contributions to maintain a right to pension but those earning between £6725 and £12570 get NIC credits without any cost.

The government have frozen earnings and profit thresholds so more tax will be recovered as prices and profits rise.

Am administrative relaxation is the adoption of the cash basis of accounting for self employed profits rather than the full invoice, accruals basis so you won’t pay income tax on sales not paid to you yet. Useful with a recession coming. However, beware there are several differences between these schemes and one has to reconcile and settle up with HMRC on those differences when one changes the basis of tax.

Should I run a company or be self-employed?
Traditionally, the opportunity for dividends at low rates offered tax advantages for those companies generating over approximately £50000 of profits pa. However, from the spring budget, this is where “marginal corporation tax rates at 26.5% apply through to £250,000.
At these rates, and with reduced National insurance, less regulation and reporting costs, in pure tax terms, self-employment may well be more tax effective. But a big warning. Traders are fully liable for their commercial liabilities. They put their livelihood on the line. In most cases, companies offer the protection of limited liability from third-party claims in an increasingly litigious world.

The old bonus versus dividend chestnut.

One important nugget is the fact that for proprietary companies, the reduction in employee NIC will further tip the balance towards taking that bonus you’ve worked so hard for rather than your customary dividends.
For several years dividends were the simplest and cheapest method of extracting profits from your company. Most proprietary businesses have a small salary of between £8000 and £12570pa and withdraw the rest as dividends.

However, the shock return to 25% full corporation tax rates from 19% and 26.5% for those with profits between £50000 and £250,000 pa in the spring budget, will shortly be felt by those small companies. Christmas time to take some money out.

For example, supposing  Mr Klaus’s company pays Mr Klaus £12570 salary and he wishes to extract a further £15000 of profit.

A bonus is tax deductible for the company between 19% and 26.5% depending on the level of pre-tax profits the company generates. Whereas dividends are a withdrawal of post-corporation tax profit.

As a basic rate taxpayer with a bonus, Mr Klaus would be liable for £3,000 (20%) income tax and £1500 (10%) employees NIC from January 24 leaving him with ££10,500 after deductions. (I’m ignoring pensions)
At higher income tax rates he would pay £6,000 income tax (40%) and £300 employees NIC (2% at higher income levels leaving him £8700 net pay

If instead Mr Klaus took dividends then the overall tax take depends on what rate or corporation tax (CT) is paid in the company first and then what he received net of tax depends on whether he has used up his £1000pa nil rate dividend allowance or not.
Assuming at the lowest  19% CT Rate company £15000 of profit gives £2850 of CT and £12150 of profit available for dividend..

As a basic rate taxpayer 12150 -1000 is taxable at 8.75% being 976 leaving £11174 in Mr Klaus’s pocket. Still the most effective route
However, at higher rates the £12150 less £1000 allowance would be chargeable at 33.75% that’s is £3763 leaving Mr Klause with £8387 rather than £8700 with a bonus.With CT at 25% the CT would be £3750 leaving £11250 for distribution.
At the basic rate with the dividend allowance Mr Klause with bear 8.75% on 11250-1000 being £984 which leaves him with £10353  in hand compared with £10500 with a bonus.

So basically, dividends remain fine at low rates of corporation tax and at basic rate income tax. As tax rates rise with profits, the advantage shifts to bonuses for the first time in a long time. So you need to talk to your accountants about your choice of options and extraction policies.

What about incentives for business investment ?
As a flagship policy of the government, for those companies, but not the self-employed with money to invest, the full expensing of most of their capital asset purchases introduced in the spring budget will be made permanent. Wahoo! So what?

This allows companies incurring qualifying expenditure on new plant machinery and commercial vehicles  (but not cars) can claim 100% first-year allowance for main rate expenditure and 50% on special rate expenditure from 1st April 2023 without limit.so at full rate every £1 can save 25% tax.Special rate expenditures will typically be integral features. For example, electrical systems, lighting systems, heating and powered ventilation systems, cold water systems, etc. So you only need to buy or fit out a building to qualify.

The OBR believe that this will increase total business investment by £ 14 billion at a cost to the Exchequer of around £ 10 billion. Nice for capital-intensive business but not so much for people and small companies .

From April 2023 the self-employed businesses and companies could only spend £200,000 pa on Annual Investment Allowances to get the same 100% deduction and £1m in the year before that.  For the average entrepreneurial business, no change there then, in practical terms. One for the big boys.For those companies thinking out of the box the valuable system of Research and Development relief is being revamped, but in response to criticism from HMRC as to the extent of abuse of claims by rogue consultants, it seems the chancellor is making it increasingly harder for small tech companies to access this highly lucrative relief. Basically an enhancement of the deductible cost of salaries and costs incurred in advancing science towards innovative solutions and opportunities to recover 14.5% of cash as an alternative to claiming tax deductions against corporation tax otherwise payable.

For private investors looking to shelter some tax perhaps on the exit from their businesses the lucrative Enterprise investment scheme and Venture capital trust reliefs are to be extended from the scheduled close date of 6th April 2025. em
These schemes can offer 30% to 50% (for SEIS) income tax deductions and freedom from capital gains tax on subsequent gains made from these medium-term investments. However, the reason for the relief is that investment is in newer more risky companies although the broker practice of offering more diversified portfolios does mitigate some risk.n £12,570 a year will pay 2% less national insurance, with self-employed

Another useful area of incentives is the Enterprise Management Incentives (EMI) which allow companies to offer share options to staff at advantaged tax rates. Care is required to get the details right and the previous 92-day deadline to Notify HMRC of the grant of an EMI were being missed with unfortunate consequences. This has been relaxed to the 6th July following the tad year in line with other employee benefits and finally a bit of levelling up in VA. The Government will consult in early 2024 on the court decision in which Uber Britannia Ltd rather than the tax driver were considered the principal and responsible for charging VAT as many other taxi firms do. So that ride home from the Christmas bash might be a tad more expensive than before.So we can summarise the Bob Cratchit would be happy but Scrooge will continue to feel the cold unless he invests significant amounts in a new coal fire.

Should you find this of interest or wish to explore how we might be able to assist you navigate these waters please feel free to give me a call on 077 1118 7555  or email me on markm@morleysca.co.uk 

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