Did Jeremy Hunt just pull off neither a good nor bad Autum Statement for contractor limited companies?

Clearly not a fan of the maxim ‘Less is More,’ Jeremy Hunt yesterday delivered Autumn Statement 2023 with an abacus-busting “110 measures” to help grow the UK economy. There were so many, he saw fit to joke, he wouldn’t go through each one.

The chancellor then immodestly proclaimed he was making “the largest business tax cut in modern British history.”

But neither of these grandiose measures will mean much - if anything at all - to the average contractor working diligently through their own limited company, at least not in net income terms, writes chartered accountant Graham Jenner, founder of Jenner & Co.

Hunt unveiled boosters for ‘small business’ – just probably not YOUR small business

If you’re reading this as a “small business”, Autumn Statement 2023 does contain a few measures which may help, even if you won’t need us accountants to pick your way through:

1. Encouraging prompt payment (Chapter 5.143) -- measures are to be introduced to encourage large companies to pay small businesses more promptly.

BUT…save for direct-to-client engagements, I’d wager that most contractors are paid promptly. Dare I say (if HMRC is reading), they’re often paid around the same time as employees!

2. Business Rates (Ch 4.17-18) -- existing measures relating to small business rates relief are to be continued.

BUT…most Personal Service Companies don’t have premises anyway and so don’t pay Business Rates!

3. Leadership training and digital-productivity tutoring (Ch 5.146, 5.148) -- for would-be SME “leaders” there will be a continued management programme after 2024-25, and to help SMEs adopt digital tech to boost productivity, a taskforce will be formed.

BUT…contractor PSCs tend not to have Dragons’ Den-style ambitions, and certainly in the IT sector, I’d say these small companies are probably more au fait with Digital than the government itself. Who knows; some IT contractors might even be invited onto the taskforce!

Let’s talk tax (in all but name)

Changes to National Insurance paid by the self-employed were announced at Autumn Statement, with some very nice (overdue) words to people who work for themselves.

Class 2 National Insurance (NI) which is a flat rate of £3.45 p/w, is to be abolished. Perhaps this is actually going to be more of a simplification measure than anything else.

Class 4 NI, which is based on business profits, is to be reduced from 9% to 8% from April 2024.

BUT…The changes to Class 2 and Class 4 only affect the unincorporated self-employed, not those operating through their own limited company.

The message from the chancellor seems to be, ‘People who have gone it alone are the backbone of the economy’ -- just not those people who have gone it alone and set up a company.

A sleight of Hunt’s hand on limited company contractor dividends…

Even more galling for PSC directors, the additional 1.25% tax levied on dividends, introduced post-pandemic, is still in place!

Hunt probably doesn’t want you to remember but it was brought in to match the increase of 1.25% points in National Insurance for the self-employed; it being seen to be only fair that those with their own limited company should contribute towards the additional funds being raised to help fund the NHS.

When he was first appointed chancellor, Hunt immediately reversed the 1.25% points increase for the self-employed, but he left in place the additional dividend tax.

As a result from April 6th 2024, it’s the following tax band and rates applicable to your dividends – plus though, your current tax-free allowance of £1,000 (tax year 2023/24) is halving to just £500 (2024-25):

• Basic tax rate: 8.75%
• Higher tax rate: 33.75%
• Additional tax rate: 39.35%

Like these unchanged rates and bands, the effective tax rate that a director-shareholder is going to suffer (in relation to corporation tax) is not changing.

The only tax changes announced yesterday are to NI. And and as well as the Class 2 abolition and Class 4 drop of 1%, those changes include a 2% cut in Class 1 NICs, effective from early next year.

Measures to incentivise employees: the two per cent cut in Employee NICs

Explaining the 2% cut, the chancellor told the House of Commons in his televised Autumn Statement speech that “high employment taxes on 27 million people working in the public and private sectors also disincentivise the hard work we should be encouraging”.

So the 2% cut in Employee National Insurance is incoming, with an unconventional start date of January 6th 2024.

BUT...although a limited company contractor is the director and hence an employee, most limited company contractors take only a small salary from the business. As a result, no National Insurance is typically payable. So, unfortunately, the chancellor’s two per cent cut will have no impact on the typical limited company contractor.

Standing back from the NI minutiae, overall, limited company contractors might well feel that they have been overlooked, as the chancellor has now cut self-employed national insurance ‘in recognition of the contribution made by self-employed people to our country during the pandemic.’

My take is that ‘small businesses’ are the backbone of the economy – and the term ‘small businesses’ would encompass those who are self-employed (sole traders) as well as those who are run a business through a limited company (PSCs). I know limited company contractors will feel disappointed that measures to help ‘small businesses’ really means ‘measures to help small businesses except limited company ones.’

Encouraging investment in machinery and equipment

Hunt placed significant importance on the fact that he is making “Full Expensing” (from his Spring Budget 2023) a permanent allowance.

Full expensing allows a business to deduct from profits the full cost of certain machinery or equipment in the year the cost is incurred. This, he proclaimed, is the historically large tax cut we ought to all get excited about, saying it leads to improved productivity and certainty for businesses and will help encourage growth.

BUT...limited company contractors don’t invest any significant amounts in equipment. The retention of the ‘Full Expensing’ allowance won’t be enough to affect the decision of whether or not to buy a new laptop, or some other piece of IT or non-IT equipment, for example.

Financial impact of Autumn Statement 2023 on the limited company contractor

Summarising the impact of the above key measures on PSCs:

Don’t shoot the messenger!

I haven’t been able to provide much good news from the chancellor for limited company contractors, in this article, but hopefully not much bad news either, save the £500 loss in the tax-free dividend allowance, which PSCs already knew about from Hunt’s Autumn Statement 2022.

Nonetheless, I will try to end with a few positive points to take from Autumn Statement 2023:

1. With 110 measures to help grow the economy, surely some of them are going to work!

2. A growing economy may provide additional opportunities for contractors.

3. A reduction in corporation tax (which was on many commentators’ wishlists), might be being purposefully held back to be announced nearer the general election.

4. If the above three fail to come to pass, Hunt did at least announce that all alcohol duty will be frozen until August 1st 2024, meaning no increase in duty on beer, cider, wine or spirits!