Whilst the key measures in Jeremy Hunt’s 2024 Spring Budget have been widely reported, taking the time to analyse these proposals can uncover the real impact on small and medium sized owner managed businesses.
So, what is changing?
R&D Tax Relief
From 1 April 2024, there will be a single merged Research and Development Expenditure Credit (RDEC) scheme, removing the historically significant SME scheme, unless the company falls within the definition of being ‘R&D intensive’.
HMRC is still increasing its enquiry activity around R&D generally to review and check claims, but the RDEC scheme opens up the opportunity for a company to claim R&D when previously it may not have qualified.
For example, HMRC has clarified that the company carrying out the R&D and bearing the risk should be the one receiving the relief rather than a nominee. In addition, grant-funded R&D also now attracts relief.
Together with new conditions introduced last year that a claimant must notify HMRC within six months of the year end if a new claim is to be made, it is now more important than ever to obtain expert advice from R&D specialists to explore what reliefs may be available for your company.
National Minimum and Living Wage
With the National Living Wage age threshold being lowered to 21 from April 2024, someone turning 21 at the start of April will see a huge 52.7% jump to their minimum wage.
This can have a significant impact on a company’s overheads. But the need to recruit good quality staff is driving up wages anyway in a candidate-led job market.
Even staff paid above the minimum wage may expect a corresponding increase, but other employee incentives may be more attractive to these workers. Such benefits may include share option schemes, equity incentives and non-cash benefits.
A proper review of salary structures and benefit packages can help to create a more rewarding and tax-efficient remuneration strategy for employees, particularly with the mandatory payrolling of benefits from April 2026.
Also, employers should bear in mind that with the minimum wage increase from April this year, any existing salary sacrifice schemes could be at risk if such schemes reduce salaries below the new minimum wage rates.
VAT
From 1 April 2024, the VAT registration threshold, which is the turnover level before VAT has to be charged on goods and services, is increasing by £5,000 to £90,000.
This may take some small companies out of the need to administer and pay VAT, making them more price competitive in the market.
Fiscal drag
Fiscal drag was not mentioned once by the Chancellor in his recent Budget but certainly reported on by the media as a key concern for taxpayers. This is where tax thresholds are frozen until 2028, so any inflationary wage rises are more exposed to tax than would have been the case if thresholds had kept pace with the prices index.
More people are being forcibly dragged into paying tax or higher rates of tax for the first time.
The annual allowance for pension contributions will remain at £60,000, as are the tapering rules and thresholds. So, as wages increase with inflation, but thresholds remain frozen thus dragging those increases into more tax, people may find it increasingly difficult to make tax-efficient pension contributions with their disposable income.
Even with employees’ national insurance contribution (NIC) rates decreasing by a third since last year, overall, for every £1 given back to workers by the NIC cut, £1.30 is taken in higher taxes because of thresholds remaining unchanged.
Corporation tax
The Chancellor also froze the corporation tax rates and thresholds.
This appears to be welcome news, as our 2023 survey of owner managed businesses revealed a clear desire amongst owner managers for consistency in business taxes. However, as costs rise so will prices to maintain profit margins, and therefore greater corporation tax liabilities could result.
A welcome development highlighted in the 2023 Autumn Statement, and confirmed in the recent Budget, was the news that Full Expensing for corporation tax would be permanent from April 2024, meaning that the purchase costs of certain plant and machinery will result in 100% tax relief, rather than attracting a lower rate of capital allowances.
Owner manager salary vs dividends
One consideration for owner managers, with the cut in employee NICs, is to see if it is better to take a higher salary, bearing in mind the overall dividends vs salary strategy and the fact that employer NICs were not also reduced.
Recent changes to NICs, the dividend allowance and corporation tax rates now mean it is less clear as to the most tax-efficient dividend vs salary mix for owner managers.
Since 6 April 2023, for higher rate and additional rate taxpayers it becomes marginally more tax efficient to take a salary rather than dividends. This assumes a 25% rate of corporation tax. But for companies with profits below £250,000, the position becomes more complicated.
For basic rate taxpayers and companies benefitting from the 19% corporate tax rate, paying dividends is likely to be the better option.
However, there are wider considerations to factor in. A salary payment could increase a claim for R&D tax credits, and also increase relevant earnings for personal pension contributions.
Ultimately the answer is: ‘it depends’. Remuneration needs to be looked at holistically, factoring in both the individual’s circumstances and those of the business. Consideration needs to be given to tax efficiency, financial stability, legal compliance, and retirement planning.
Conclusion
Overall, the Spring Budget did not provide a great deal of comfort for owner managers, but there are some detailed changes in taxes which could be helpful with careful planning and thought.
Mark Richdon, Tax Director at Bishop Fleming