Changes boost the self employed - February 1st 2024

November’s Autumn Statement included some good news for the self-employed, with class 2 national insurance contributions (NICs) abolished in most cases, a cut to the main rate of class 4 NIC, the expansion of the cash basis for calculating trading profit and further relaxation of the Making Tax Digital (MTD) rules.

National insurance cuts

Class 2 NICs are currently paid at a flat weekly rate, and it is these contributions that give entitlement to contributory benefits, such as the State pension (35 qualifying years being required to receive a full pension). Until 6 April 2024 class 2 NICs are paid when profits are between £6,725 and £12,570, although NICs can be paid on a voluntarily basis if profits are lower.

• From 6 April 2024, any self-employed person with profits of £6,725 or more will be entitled to contributory benefits without having to pay class 2 NICs – an annual saving of £179 for those who would otherwise have had to pay.

• However, those with profits below £6,725 will still have to pay voluntarily if they wish to maintain access to contributory benefits. Therefore, a self-employed person with profits just below £6,725 might decide to forego claiming sufficient expenses to meet the income limit – although the overall tax impact of doing so must be considered.

Class 4 NICs are earnings-related. The main rate – currently 9% – is paid on profits between £12,570 and £50,270, with a rate of 2% on profits in excess of £50,270. For 2024/25, the main rate of class 4 NICs is to be reduced to 8%, representing a maximum saving of £377. The rate of 2% is unchanged.

The cash basis

The accruals basis is currently the default for calculating trading profit for sole traders and partnerships. From 2024/25, the cash basis will become the default, although the accruals basis will still be available for those who opt out of the cash basis. In line with this change, three restrictions that previously applied to the cash basis will be removed:

1. Turnover restriction: A business, regardless of size, will now be able to use the cash basis.

2. Interest costs: The maximum deduction of £500 will no longer apply and interest costs will be fully deductible.

3. Losses: A loss incurred under the cash basis will be relievable in the same way as an accruals basis loss. Under existing rules, a cash basis loss cannot be relieved against other income or carried back.

The cash basis removes complexities such as accruals and most capital allowances, though it will be unsuitable for some businesses, especially larger ones. Banks and other financial institutions may still insist on the accruals basis being used.

Making Tax Digital

Making Tax Digital (MTD) for self-employed workers is due to be introduced from April 2026. The initial mandate will only apply to those with income of more than £50,000; those with income between £30,000 and £50,000 will be expected to join the scheme a year later. The government has committed to review the needs of smaller businesses – those with income under the £30,000 threshold – but any plans to incorporate smaller earners into the programme have been shelved for the foreseeable future.

Reporting

There are also some reporting changes. Year-end reporting was originally going to consist of two separate steps, but there will now just be the one final declaration. Quarterly reports will become cumulative, so any errors will simply be corrected on the next report – rather than the previous requirement to resubmit past quarters. Guidance on training costs is to be clarified so that a deduction can be claimed for updating existing skills or maintaining pace with technological advances and changes in industry practices.