28 Dec 2023

Self-employed workers – what’s changed?

As of March 2022, there were an estimated 4.2 million self-employed workers in the UK. In the 2023 Autumn statement, the government announced a number of measures that will impact them.

Although many of the policies are designed to benefit this group of workers, many argue that they did not go far enough. Particularly considering that self-employed workers were recognised as ‘acting as the backbone of the UK during the pandemic.’

So, what has changed?

National Insurance cuts
The headline change from the statement was the reduction of Class 4 National Insurance (NI) from 9% to 8% from April 2024, together with the abolishing of Class 2 NI.

Self-employed people who pay Class 4 NI at 9% on earnings between £12,570 and £50,270 will see a cut of 1% to 8% from April. In comparison, the main rate for employees will be cut from 12% to 10% from January 2024.

Despite the government announcing that 2 million self-employed people will benefit from these cuts, the abolishment of Class 2 NI for those earning more than £12,570, for example, will only save those people a minuscule £3.45 per week.

The Small Profits Threshold, which is the point at which the self-employed start to receive National Insurance credits, has also been frozen at £6,725, in line with last year’s approach.

Whilst any tax cuts are of course very welcome in the current climate, their impact is likely to be limited. For one, many small business owners who run their businesses via a limited company will have a remuneration structure with a small salary that does not attract NI at all. This means that entrepreneurs who also play a big part in the UK economy will see limited improvements.

The reduction in NI also will not make a dent in the fiscal drag which has been created by the freezing of income tax thresholds until 2028.

Pension changes
Despite Class 2 National Insurance Contributions (NICs) being abolished, self-employed people will continue to receive access to state benefits such as state pension through a ‘National Insurance credit’. State pension was confirmed to rise by 8.5% to £221.20 per week from April 2024 as the triple lock was confirmed.

Simplifying Making Tax Digital
The government launched a review of how Making Tax Digital (MTD) would benefit Small Businesses earlier this year and announced the outcome as part of the Autumn Statement.

As a result of the findings, the government plans to further simplify and improve the MTD system including making design changes, removing the requirement to provide an End of Period Statement and exempting some taxpayers–including those without a National Insurance number–from MTD. Further details are to be published later this year.

Clarifying the training cost grey area
Currently those who are self-employed can claim business expenses for training that helps to improve their skills and knowledge, such as refresher courses. However, courses must be related to the business and cannot be intended for starting a new business or expanding into a new area of business. This, unsurprisingly, creates a grey area around what is or is not included.

It was announced that HMRC will be rewriting the guidance to provide more clarity to businesses on what costs are deductible. According to the government: ‘This will ensure that individuals can be confident that updating existing skills or maintaining pace with technological advances or changes in industry practices, are allowable costs for tax purposes.’

Cash basis accounting
Cash basis accounting will become the default method for self-employed individuals and partnerships from 6 April 2024, with an opt-out for businesses who wish to use the accruals basis instead.

The £150,000 turnover threshold for using the cash basis will be removed, along with the £500 limit on interest deductions.

Cash basis accounting means that businesses will only need to account for their income and expenses when they receive payment or pay for an expense. In other words, when it comes in and out of the business bank account. This means that at the end of the tax year, they will only pay Income Tax on money received in their accounting period and will not need to calculate debtors (money owed to them) and creditors (money they owe) at the year-end.

Self-Assessment tax returns for higher earners
Currently, those who receive more than £100,000 a year through PAYE are required to file a Self-Assessment tax return with HMRC. From April 2024, those with income that is fully taxed through PAYE will no longer have to file a tax return, regardless of how much they earn.

Although many of these moves, such as the reduction in NI, present steps in the right direction, with inflation taking longer to come down than initially anticipated and the overall tax burden at its highest level in 70 years, the true impact remains to be seen.

Monahans is here to help your business navigate the world of taxation and relief. For more information on what the Autumn Statement Budget 2023 means for you and your business, please get in touch.

You can also download and read our Autumn Statement Budget 2023: Summary and Key Announcements publication here.

Clare Bowen