This time last year I highlighted that more people would either be paying tax or paying more tax, because the tax thresholds remained unchanged or in some cases lowered, while inflation and higher interest rates boosted income. That will continue to be the case in 2024/25.
That should boost tax revenues, which should be good news for the Government, but the cost of financing the National Debt outweighs those gains, and arguably limited the flexibility the Chancellor may have wanted for more tax cuts, ahead of a General Election. We do have lower employee National Insurance rates and lower NI for the Self-Employed in 2023/24 and the State Pension continues to rise in line with inflation thanks to the “Triple Lock”.
I want this note to act as a prompt to remind you that we are ready to begin work on your 2023-24 tax return, which we hope will act as a prompt to get your papers ready sooner rather than later.
1. Unchanged Thresholds and ‘Fiscal drag’
I noted last year that unless your circumstances change materially, you will pay more tax, certainly in 2023/24 and in the years that follow. This is because the thresholds at which higher rates of tax are charged have not changed, despite several years of higher inflation, while interest rates have risen, meaning that those earning bank interest are more likely to exceed the tax-free thresholds (£1,000 for Basic Rate taxpayers and £500 for higher rate taxpayers) and pay tax on that interest.
The key unchanged thresholds are:
- the Personal Allowance, where the first £12,570 of taxable income is free of tax (until taxable income exceeds £100,000);
- the Higher Rate Threshold – £50,270, the point at which higher rate tax (40% Income Tax or 33.75% on dividends) applies; and
- £100,000, at which point the Personal Allowance is withdrawn at a rate of £1 for every additional £2 of taxable income.
Unchanged thresholds and higher incomes will mean that more people are drawn into paying higher rate tax, a situation referred to as ‘fiscal drag’.
For those just above the Higher Rate and £100,000 thresholds, remember that charitable donations, or Personal pension contributions can be used to change the point at which the higher rates or loss of Personal Allowance kicks in.
2. The State of Play at HMRC
This time last year, I noted that it had not been a good year for HMRC, and things have not got better. At the end of March, HMRC issued a press release announcing the closure of the Self-Assessment helpline for six months, only to reverse the decision 24 hours later.
HMRC continue to be in a vicious circle. On one hand they want to reduce the dependency on the helpline, by rolling out more online services. On the other hand, the gap between what online services can offer and what taxpayers and agents need from the helpline is too great.
Culturally, it feels like there is a failure from HMRC to recognise the issues. As an agent we receive regular e-mails from HMRC rolling out new online services and offering webinar training for basic services. Those emails imply they are a modern functioning flexible organisation. On the other hand, we have the agent helpline. This is the best way of dealing with complex tax issues or with issues that have not been resolved on a timely basis. Before Covid, it was pretty much guaranteed that you would get a reply within 10 minutes. These days it is nearer 50 minutes after which it is a matter of chance whether the person answering the call will be able to help. There are some excellent helpful members of staff at HMRC but there are fewer and fewer of them.
At a recent appearance before the Treasury Select Committee, HMRC Head Jim Harra admitted that 1/3 of his staff were paid at or below the National Living Wage of £11.44 per hour. This hardly seems an enticement for anyone to want to work for HMRC.
Escalation, via a complaint and the promise of a “technician call back”, passes the responsibility for resolution to HMRC and you just have to wait.
The reality gap between the front line and senior management at HMRC seems huge, and culturally, it feels similar to what we have discovered about the Post Office. Now, in this case, no-one has incorrectly been sent to jail, but there is still that sense that the protection of the “brand” at all costs is vitally important.
Back in March 2015, George Osborne promised the end of the tax return by 2021 to great fanfare. What he failed to mention at the time was that the end of the tax return was dependent on a fundamental re-structuring of the HMRC IT infrastructure, so that a single integrated structure could exist where PAYE information could be viewed online alongside Self-Assessment filings for Self-Employment and Property Rental. Osborne had perhaps not taken into account the history of failure in delivering IT infrastructure in the private sector. Hundreds of millions of pounds were spent in the 1990s on a failed NHS system, and on the DWP/Post Office Horizon system, which was installed only in the Post Office, but not the DWP, with consequences that are only becoming apparent to the UK population more than 20 years later.
3. Making Tax Digital for Income Tax ‘ITSA’ Pilot
April 2024 sees the re-launch of Making Tax Digital (MTD) for Income Tax pilot, which is scheduled to go live in April 2026 for unincorporated businesses and landlords with business and/or rental income of at least £50,000. Within the accountancy profession there is a lack of belief that it will succeed. As of the time of writing, neither of the two accounting software providers that I use are allowed to participate. Certain groups of taxpayers – Partnerships and joint owners of property – are not in scope yet, as the National Insurance number is the primary field rather than the Self-Assessment Unique Tax Reference.
MTD for Income Tax will then be extended to unincorporated businesses and landlords with business or rental income in excess of £30,000 from April 2027.
4. Planning for your 2023-24 Tax return
Our Request for Information for your 2023-24 Tax Return
The tax return and the tax computation for 2023/24 will be broadly similar to last year. The tax-free Personal Allowance remains at £12,570, after which income is taxed at the basic rate of 20% up to £50,270. The Higher Rate tax of 40% applies up to £150,000, after which income is taxed at 45%. The Personal Allowance begins to be lost at £100,000, until it is all lost once taxable income reaches £125,140. Between £100,000 and £125,140 the marginal rate of tax on income is either 60% or 53.75%.
The Dividend Allowance has been reduced from £2,000 to £1,000 in 2023/24 and will fall again to £500 in 2024/25.
The threshold at which Capital Gains is applied has fallen from £12,300 to £6,000 in 2023/24 and will fall to £3,000 in 2024/25.
5. Companies House changes
This note is predominantly focussed on Self-Assessment, but I would like to highlight some significant changes taking place for Limited Companies around Company set-up and reporting following the passing of the “Economic Crime & Corporate Transparency Act 2023”. It had become too easy to set up a limited company without the most basic of identity checks. From March 2024 onwards, some new changes have been introduced:
- Companies must state that they have been created for lawful purposes, and supply a registered email address when a Company is created.
- Officers of Companies and those “Persons with Significant Control” will be required to prove their identity when a Company is set up, and there will be an exercise for existing companies to update Companies House with that information.
- The Registered Office for a Company must be an “appropriate address” where any document sent there will come to the attention of a person who can act on behalf of the Company, and not just be a “template” address.
- Companies House have increased powers to check data on the Company register.
All this will increase supervisory and other costs at Companies House, and so annual Companies House filing fees will increase significantly. The fee for the submission of the annual Confirmation statement will increase from £13 to £34.
6. Tax changes for 2023-24 and Beyond
This section summarises some of the main changes announced by Chancellor Jeremy Hunt in the 2023 Autumn statement and 2024 Spring Budget.
National Insurance Rate Changes
The rate of Class 1 Employee National Insurance on monthly salaries above £1,047.50 falls from 10% to 8% from 6 April 2024, which means higher net salaries for all employees earning above that level. Employer NI remains unchanged at 13.8% above £758 per month.
For those who are Self-Employed, the rate of Class 4 National Insurance has fallen from 9% to 8% from April 2024.
High Income Child Benefit Tax Charge Reform
In one case, the Higher Rate Child Benefit charge, the Government has recognised that the level of tax imposed is harsh. From April 2024, the point at which Child Benefit is withdrawn rises to £60,000 and the upper threshold has risen to £80,000, meaning that the point at which all Child Benefit is completely lost rises from £60,000 to £80,000.
VAT Registration
The VAT Registration threshold has risen to £90,000 from £85,000 from April 2024. This is one area where the Government has taken account of the impact of inflation.
Pressure from the likes of Dan Neidle (a tax lawyer/investigative journalist) to address the VAT Threshold cliff edge issue has once gain been ignored.
CGT Rate on Residential Property Gains
Where someone owns a residential property that is not their principal private residence, they will pay Capital Gains Tax on any gain between the sale proceeds and cost of the property, with relief being given for any period in which the property was the principal private residence. Where the combined capital gain and income for a given tax year exceeds £50,270, from April 2024 the rate of CGT on the gain is a higher rate, previously 28%, but is now 24%.
This is obviously good news but comes in at the same time that the tax-free CGT threshold has been reduced from £6,000 to £3,000. Yet another example of contradictory policy.
Furnished Holiday Lettings
Currently there are two tax treatments for UK rental properties. One of these – FHL – is more favourable as, for example, it allows full claim of mortgage insurance and allows more discretion in the split of net taxable income between owners. FHL tax treatment is to be abolished from 5 April 2025, perhaps because it will lower demand for “second homers” to buy property in places like South Devon, which in turn might increase the availability of affordable housing. Perhaps also because it makes the design and implementation for Making Tax Digital for ITSA a little easier!
Non-Dom Changes
Issues of residence and domicile are among the most complex in the UK tax regime. One area within this world that is not well understood but is well publicised is that of “Non-Doms” (or Non-Domiciled, or more simply put people who live in the UK but are not citizens) and what we know about them is that they probably don’t pay enough tax! Anyway, that should all end from 2025 with the introduction of a four-year transitional period after which UK Resident Non-Doms will be subject to the same rules as any other UK Resident.
Other measures
There are other measures as well – the UK ISA, abolition of multiple dwellings relief for Stamp Duty, a Vaping duty, and the introduction of 6 more investment zones, who will benefit from tax reliefs, such as more generous thresholds for National Insurance charges.
7. Pensions
As noted last year, Jeremy Hunt’s March 2023 budget introduced the most interesting changes to pensions since the 25% tax free drawdown rules were introduced. At a high level, there were two significant changes for those with personal and/or company pension schemes:
- The Annual Allowance – which is the maximum amount on which tax relief on pension contributions is granted in a single tax year – was increased from £40,000 to £60,000
- The Lifetime Allowance – a cap over which tax relief on total lifetime pension contributions – which was previously set at £1,070,000 has been abolished.
As accountants, we do not offer pensions advice, but we can illustrate potential tax benefits of pension contributions. There is clearly a close link for many between tax planning and pension planning. What we can do as accountants is to advise on the tax benefits of making pension contributions, and I wanted to highlight a couple of areas that have been a point of discussion with clients:
- The State Pension – the availability of online information for the State retirement pension has improved a lot in recent years. People can access their forecast State Pension via their Personal Tax Account (accessible via the government gateway), which I would encourage everyone to sign up to.
- Personal Pensions for the Self-Employed – there can be two tax benefits of making personal pension contributions. Firstly, any qualifying contribution is topped up by the government by 20% so you can build up a pension pot with that uplift – the ‘quid pro quo’ being that you get taxed when you withdraw the pension (although you can get the first 25% of a drawdown for free). Secondly, you can use personal pension contributions to pay less tax.
- Company Pensions for Owner-Managed businesses – where a Owner-Managed Company has profits over £50,000, the business will become subject to 25% Corporation Tax. Provided they stay within the annual allowance threshold of £60,000, a shareholder-director can make additional pension contributions through the company can reduce profits to £50,000 or below, saving 26.5% in Corporation Tax.
8. Key Tax Rates and Thresholds for 2023-24 and 2024-25
In these tables we are publishing some key tax rates for both 2023-24 and 2024-25. The 2023-24 rates will be relevant for the next Self-Assessment Tax Returns due for submission by 31 January 2025. The 2023-24 rates will be relevant for any income and expense you have from 6 April 2024. Please feel free to download the pdf below.
