For limited companies at Spring Budget 2024, did Hunt giveth or taketh away?

Yesterday chancellor Jeremy Hunt hailed his Spring Budget 2024 as a “Budget for long term growth.”

Limited company contractors have been left feeling short-changed by Mr Hunt’s previous announcements – has he done better this year?

Let’s look from such a contractor’s perspective at the ‘highs’ and ‘lows’ of what may or may not be the last fiscal statement before a general election, writes Matt Fryer, managing director of contractor accountancy firm Brookson.

1. National Insurance

A further 2p cut in Employee’s National Insurance from 10% to 8% was announced from April 6th 2024 (on income between £12,570 and £50,270 a year).

It’s welcome news for employees. In addition, the main rate of self-employed National Insurance (Class 4 NICs) will reduce to just 6% from April 2024. 

But there’s a ‘but,’ and it’s a big BUT...

Most limited company contractors will not see any benefit from these National Insurance changes.

Generally, most directors of contractor limited companies consider the optimum level at which to set their director’s salary to be £12,570 (which is equal to the personal allowance and the Employee’s National Insurance threshold - and offers corporation tax relief).

In most cases, there is no income tax or employee National Insurance payable on this amount, with residual amounts taken as dividends from their company (which don’t attract National Insurance).

An NICs cut of (in total with Jan 6th’s 2p cut) £900 a year; who wins and loses?

Put plainly, the winners benefiting from Spring Budget’s big announcement on National Insurance cuts are the employed (including umbrella contractors) and self-employed individuals operating as sole traders (unincorporated business owners). 

Many contractors (operating on outside IR35 contracts) are unwilling to work via an umbrella company and are, in the main, precluded from working as sole traders if they work via recruitment agencies. 

To put this in context, an umbrella employee with a weekly contract rate of £1,600, will benefit from an increase in annual net pay of circa £1,500 based on the reduction of Employee’s National Insurance from 12% to 8% over recent Budgets.

However, for many contractors operating through their own limited company there are no benefits afforded to them from Hunt’s changes to NI rates.

2. Limited company contractor dividends

As previously announced, from April 6th 2024, there have been no changes to tax bands and rates applicable to limited company dividends. 

However, the current tax-free allowance of £1,000 (tax year 2023/24) is halving to £500 (tax year 2024/25).

The impact of this change is to push an additional £500 into taxable dividend income - an increase in dividend tax of £44 per year.

3. Further company tax planning?

Admittedly, £44 is a relatively insignificant amount, however, for limited company contractors with spouses (or civil partners), this may be an ideal time to look at appointing your spouse as an additional shareholder of your company with the following benefits:

• Dividend income - you can provide them with dividends from company profits.
• Tax benefits - by adding a shareholder (particularly if the spouse or civil partner is in a lower tax bracket to yourself) you can take advantage of a combined lower tax rate.
• Business continuity - if something should happen to you, then a spouse/civil partner can step in to help keep the company running.

4. Corporation tax

From April 1st 2024, limited companies will be impacted by the previously announced uplift of the mainstream corporation tax rate from 19% to 25%. 

However, for limited company contractors, with taxable company profits (not income) of less than £50,000, the current small company corporation tax rate of 19% will still apply. 

As a director, you should now more than ever ensure that you claim all allowable expenses and consider making company pension contributions to bring profits down to mitigate the impact of this change.

5. VAT

The increase in the VAT registration threshold to £90,000 a year (turnover) is a welcome announcement, as it will result in fewer businesses being pulled into mandatory VAT registration.

Finally, six further takeaways of Spring Budget 2024 for contractors

There hasn’t been much to shout about for PSC contractors in this Budget – there was no rabbit out the hat, no IR35 mention, and no new legislation to govern umbrella companies.

As a result, it’s ‘business as usual’ for contractors, meaning three additional things:

• Generally, a contractor working via their own limited company (who is outside IR35) continues to enjoy greater tax planning opportunities than a permanent employee or an umbrella company contractor.
• There hasn’t been any new legislation in this Spring Budget that will impact Personal Service Companies (PSCs) detrimentally. This is perhaps a good takeaway following the many adverse changes made in recent years.
• Personal tax changes and your own individual circumstances could therefore matter more. For example, the uplift in the High Income Child Benefit threshold to £60,000 from April 2024 is a welcome announcement, together with the freezing of fuel and alcohol duties!

But just as sure as chancellors giveth with one hand and taketh away with the other at Budgets, the devil of Spring Budget 2024 will invariably be in the detail!

So we advocate speaking to your accountant in respect of the specific impact to both your personal and company tax position, following what could be the last major tax and spending announcements before the UK goes to the polls later this year.