Budget, PAYE, Tax

NIC Changes

Employers’ class 1 NIC

The secondary class 1 NIC rates and thresholds (paid by employers) were not altered in the Spring Statement, and the rate is increasing from 13.8% to 15.05% on 6 April 2022. 

For 2022/23 the various secondary class 1 NIC thresholds are:

  Secondary class 1 NIC Thresholds
For most employees the employer pays at 15.05% on wages:
Per week:£175
Per month:£758
Per year:£9,100
If the employee is an apprentice or aged under 21 employer pays class 1 NIC at 15.05% on wages above:
Per week:£967
Per month:£4,189
Per year:£50,270
For new employees working at least 60% of their time in a Freeport site the employer can claim relief from class 1 NIC on wages up to: 
Per week:£481
Per month:£2,083
Per year:£25,000

Employees’ class 1 NIC 

The rates of primary class 1 NIC paid by employees are increasing on 6 April 2022 from 12% to 13.25% and from 2% to 3.25% for the upper rate.

The lower earnings limit (LEL) has not been changed from the proposed level for 2022/23, which will be: £123 per week, £533 per month, £6,396 per year. On earnings between the LEL and the primary threshold, the employee pays class NIC at 0%, thus receives NIC credit for those wages.

The upper earnings limit (UEL) has also not been changed by the Spring Statement, and will stay at the proposed thresholds for 2022/23 of £967 per week, £4,189 per month, £50,270 per year. On earnings above the UEL, the employee will pay class 1 NIC at 3.35% for 2022/23.

The complication introduced by the Spring Statement is that the primary threshold (PT) for class 1 NIC will change part way through the tax year on 6 July 2022. The employee will pay class 1 NIC at 13.25% on earnings between the LEL and the PT for 2022/23.  

Class 1 NIC primary thresholds 6 April to 5 July 2022 6 July 2022 to 5 April 2023 
Per week£190£242
Per month£823£1048
Per year£9,880£12,570

As NIC is paid according to the pay period, and is not cumulative, only nine months of earnings (from July 2022 to March 2023) will benefit from the higher PT.

Company directors tend to use an annual or quarterly earnings period. Those on quarterly pay will use the lower threshold for the first quarter to 5 July 2022, and the higher PT for the remainder of the year. Those on annual earnings period will use a PT of £11,908 for 2022/23 as specified in clause 4(2) of the National Insurance Contributions (Increase of Thresholds) Bill 2022.

Self-employed class 4 

The lower profits limit (LPL), from which class 4 NIC becomes payable, is also increased to align with the personal allowance of £12,570, but over two years. The upper profits limit is frozen at £50,270.

Tax Year Main rate Additional rateLPLUpper profits limit
2022/2310.25%3.25%£11,908£50,270
2023/2410.25%*3.25%*£12,570£50,270

* Including Health and Social Care levy

For 2022/23 the LPL will be £11,908, that is nine months of the increased level, to make it equivalent to the same NIC allowance enjoyed by employees. Although the self-employed individual will pay class 4 NIC at the main rate of 10.25%, which is three percentage points lower than the class 1 NIC paid on the same income band by an employee.  

Self-employed class 2 NIC

The class 2 NIC paid by the self-employed creates a contribution record for the individual, unlike the class 4 NIC, which is a pure tax. 

The class 2 small profits threshold (SPT) will remain in place from April 2022, but the individual will not be liable to pay class 2 NIC until their profits exceed the lower profits threshold for the tax year, which is aligned with the lower profits threshold for class 4 NIC.

Tax year Flat rate per week   Small profits threshold  Lower profits limit 
2022/23£3.15£6,725£11,908 
2023/24TBATBA £12,570

New class 2 NI credit 

Where the individual has annual profits between the SPT and the LPL, they will effectively build up a NI credit for that year, while paying zero class 2 NIC. Note that the taxpayer has to make profits at least equal to the SPT for the year in order to benefit from this class 2 NI credit. 

In order to receive the class 2 NI credit the taxpayer will have to submit a tax return, although if they have no other income in the year they will have no tax to pay. 

The introduction of the class 2 NI credit does not eliminate the need for voluntary class 2 NIC payments. Where the trading profits are less than the SPT the individual may still wish to pay voluntary class 2 NIC in order to maintain their contribution record and qualify for the state pension, as well as for other contributory benefits.

DMS Posts, PAYE, Tax

Sunak aligns NIC and income tax in Spring Statement

The Chancellor is

aligning the class 1 national insurance contributions primary threshold with the personal allowance of £12,570. 

As I predicted it is impossible to implement this change in payrolls run for April 2022, as it takes time to rewrite payroll software, but it will come into force from 6 July 2022. 

Note that the secondary class 1 NIC threshold, where employers start paying class 1 NIC, will not be raised to align with the primary threshold. Employers will pay class 1 NIC at 15.05% on most employees’ salaries above £9,100 from 6 April 2022. Different secondary class 1 NIC thresholds apply for apprentices and freelance employees. 

Self-employed NICs

The Chancellor has gone further than I expected, with plans to align the thresholds where the self-employed start paying class 2 NIC and class 4 NIC, with the personal allowance, but not immediately. 

The class 4 NIC lower profits limit will rise to £11,908 for 2022/23 and then be aligned with the personal allowance of £12,570 from 6 April 2023. This two-step increase is presumably implemented to shadow the delayed rise in class 1 NIC from 6 July 2022.

Class 2 NIC is currently payable once the individual’s profits for the year exceed the small profits threshold of £6,515. This relatively low payment threshold exists to allow self-employed individuals with small profits to build up a contribution record for the state pension and other benefits. 

From 2022/23 the threshold for paying class 2 NIC will be aligned with that for paying Class 4 NIC: £11,908 for 2022/23, then £12,570 for 2023/24. However, this large step up could leave many low-profit traders with no national insurance contributions for many tax years. 

To solve this problem from 6 April 2022 self-employed traders with profits below the lower profits limit will be treated as if they had paid class 2 NIC, but in fact they will make no actual NICs payment.  

The Government has already published a draft National Insurance (Increase of Thresholds) Bill 2022, which will bring these changes into effect. This Bill will be fast-tracked through Parliament.    

Employment allowance 

In a sop to small businesses the employment allowance will rise from £4,000 to £5,000 from 6 April 2022. This allowance can only be claimed by employers that had a class 1 NIC liability of no more than £100,000 in the previous tax year. The increase will allow an eligible employer to pay one extra person on the national minimum wage without having to pay employer’s class 1 NIC.

The detail in the Spring Statement also confirmed that the employment allowance will cover the employers’ liability for the Health and Social Care levy.   

Basic rate cut 

The promised cut in the basic rate of income tax from 20% to 19%, is slated to apply from 6 April 2024, but that is a long way off. As the past month has shown, the world can change significantly in a few weeks, and I wouldn’t like to predict where we will be in the spring of 2024.

In his Mais lecture last month Chancellor Rishi Sunak set out the principles that underpin his tax policy. At the core is a desire to cut taxes, but only where those cuts can be funded, and he restated that belief in his Spring Statement. 

To find out how much the tax cuts are all going to cost you need to dig into the Spring Statement 2022 policy costings document. For example, the increases in NIC thresholds to align with the personal allowance will cost £26.345bn over five years to 2026/27. 

The costings document sets out three additional sources of income for the Treasury:

  • HMRC compliance (tax enquiries): £3.156bn
  • DWP compliance (benefit fraud and error): £2.24bn
  • Student loans (frozen thresholds increased interest): £35.215bn

The conclusion must be that the next generation will be funding today’s tax cuts by paying handsomely in increased student loan repayments.   

Autumn plans 

Perhaps further detail on how the tax and NIC cuts will be funded will be revealed in the Autumn Budget. In Sunak’s 12-page Tax Plan was a vague reference to reforming tax reliefs and allowances and an aspiration to make the tax system “simpler, fairer and more efficient”.

DMS Posts

MTD ITSA: Your questions answered – part 2

by Rebecca Cave

What are the basic requirements for MTD ITSA?

There are four requirements for MTD ITSA (draft reg 3):

  1. record business transactions in a digital manner
  2. preserve those records for the defined period
  3. provide a quarterly update to HMRC
  4. provide an end of period statement (EOPS) to HMRC 

The records in 1) and 2) comprise data needed to populate the reports required for points 3) and 4), which in turn must be submitted using MTD-compatible software.

The digital means for recording the data does not have to be the same software that submits the data. However, there should be a digital link between the recording software and the submission software. 

What exactly must be recorded?

Each transaction must have these data points recorded digitally:

  • the date of the transaction – the exact time is not required
  • for expenses – the category out of the specified list of expenses (see below)  
  • for income – the trade or property business the income relates to   
  • the amount or value. 

Retail businesses will be able to elect to record daily gross takings rather than every single transaction (draft reg 17), but only if it would be unreasonable for the business to keep digital records of every individual sale. 

In addition, the business will have to record the following permanent information as part of its digital records:  

∙ the business name 

∙ the address of the principal place of business 

∙ whether it uses cash accounting or accruals accounting

Can the client give their accountant paper records to enter into software? 

The taxpayer does not have to record the business data digitally themselves. They can pass this task over to a bookkeeper or to their accountant to make the entries into accounting software, or a spreadsheet.

Although the aim of MTD is to encourage businesses to record their business transactions in real-time, as they occur, there is nothing in the draft regulations that stipulates exactly when the data must be committed into the digital record. As long as the data for the quarter is recorded before the quarterly submission is compiled and sent to HMRC, there is nothing to prevent a bulk recording of transactions every few weeks or months.

However, the longer the delay between the transaction and being recorded digitally, the greater the risk of loss or corruption of data – which is the whole point of MTD (as HMRC would argue).    

Can a spreadsheet be the first entry for digital records?

A spreadsheet can be the entry point for transactional data into the accounting system. However, once that data has been recorded, the MTD regulations stipulate that there should be “digital links” that move the data around the accounting system. This means the data should not be retyped or copied by human hand once it has entered the system. 

Think about where the accounting system starts. That is the point the transaction (sale or purchase) is recorded. It may be convenient to capture transactions using optical character readers, or bank feeds, but that doesn’t have to be the entry point of all the data.  

A business can still issue paper invoices if the information from that invoice is digitally recorded in the accounting system.  

What information is required to be submitted quarterly?

The quarterly submissions will be the totals for the quarter of:

  • sales income for each trade
  • purchases/expenses for each category 

The categories of expenses are expected to be the same as those currently required in the self-employment section (form SA105) and property section (form SA103F) of the self-assessment tax return. More detail will be set out in the final MTD ITSA regulations.

In essence, the quarterly submission is a rough profit and loss account, no balance sheet figures are required. The data for individual transactions are not required.

Can the accountant make changes in the final submission?

This quarterly data dump does not have to be accurate, any misallocation between expense categories can be adjusted at the end of the period statement (EOPS).

It is in the EOPS that the accountant can make any adjustments for capital allowances, losses, reliefs, disallowable expenses, transactions that have been missed or double-counted.  

One EOPS will be required of each trade or property business by 31 January following the end of the tax year. 

Can the taxpayer submit estimated figures on the quarterly submissions?

Yes, if the taxpayer wishes to submit estimated expense figures, or even only the income amounts, in the quarterly submissions, that would be acceptable within the current draft MTD regulations. 

To avoid the risk of a penalty for late filing some form of data needs to be submitted each quarter.   

The quarterly submissions do not contain an accuracy statement. The taxpayer (or accountant) is not required to declare that the quarterly submission is a complete or correct reflection of the net or gross income of the business. 

The taxpayer must make a declaration of accuracy on the EOPS, once all the adjustments for the four quarters have been made.

What will HMRC do with the quarterly data?

The quarterly submission will be used by HMRC to calculate an estimate of the business’s tax liability throughout the year, and that figure will be reflected back to the taxpayer. This is likely to confuse rather than assist the taxpayer as the current timing of tax payments will not be changed (for now).

Will tax payments change to quarterly?

Earlier this year there was a Call for evidence: timely payment, which asked for ideas on how the payment of income tax under self assessment, and corporation tax for small companies, could move to more frequent payment dates based on in-year calculations.

DMS Posts, Tax

MTD for ITSA: Your questions answered

by Rebecca Cave

These answers are based on the guidance produced so far by the professional bodies and HMRC, the draft legislation and consultation documents. The final regulations for MTD for income tax (MTD ITSA) will be published in the Autumn (probably in October), so we can’t be confident of how the rules will work exactly until we see those regs.  

When must a business join MTD?

It is now apparent that there will be a big bang joining date for MTD ITSA on 6 April 2023 for all unincorporated businesses, whatever their current accounting period end.

Changing to a tax year basis from 2023/24 will mean that all businesses will have to report income and expenses that fall exactly into the tax year. Also, the draft legislation to bring about this change deems an accounting period ending on 31 March to be treated as ending on 5 April for tax purposes.

This combination of basis period and deeming provision means that unincorporated businesses will need to enter the MTD ITSA regime from the next accounting period starting on or after 1 April 2023. Thus businesses which draw up accounts to 31 March 2023 will join MTD ISA from 1 April 2023 not 1 April 2024.

It is possible that Treasury Ministers will be persuaded that having all unincorporated businesses joining MTD ITSA at exactly the same time, and reporting to the same quarterly deadlines, will put an impossible strain on HMRC’s systems and resources. We will have to wait and see what the final MTD regulations say when they are released.   

Will the turnover threshold change?

We do not expect the turnover threshold to change in the final MTD ITSA regulations. HMRC has made it clear that all unincorporated businesses with an annual turnover exceeding £10,000 will be required to report income and expenses under MTD ITSA.

This turnover threshold takes into account income from all businesses, trades and property. A person with £6,000 of trading income and £6,000 of rental income will be required to report under MTD ITSA as their total turnover exceeds £10,000.

Will there be any deferral of start date?

Partnerships which only have individuals as partners will have to join MTD ITSA from April 2023.

However, there will be a deferral (for an undefined period) for MTD ITSA mandation for the following categories of partnership:

  • Partnerships containing a corporate partner
  • LLPs
  • Limited partnerships

Will there be any exemptions?

The latest MTD ITSA policy update indicates that the following taxpayers will have full exemption from MTD ITSA:

  • Trusts (including trusts with property income)
  • Estates of deceased persons
  • Trustees of registered pension schemes
  • Non-resident companies 

In addition, some individuals may be able to claim exemption from MTD ITSA on the basis that they are digitally excluded.

We do not have the HMRC guidance for MTD ITSA at this point yet, but VAT Notice 700/22 indicates that if the taxpayer can get any internet access at their home, business or to another location they will not be exempt on the basis of digital exclusion. This takes no account of the speed or reliability of the internet access.    

Any easement?

HMRC has confirmed that there will be no easement for taxpayers attempting to comply with the MTD ITSA regulations in the first year, but a late filing penalty will not apply until four quarterly submissions have been filed late.

There is no information yet on whether penalties will apply for inaccurate quarterly submissions under MTD ITSA. 

The whole system of penalties for late filing and late payment of income tax and VAT is to be revised as set out in FA 2021 ss116-118, schs 24, 25, 26. The changes impose a complex system of points that build up to a financial penalty. It is expected that this new system will be brought in alongside MTD ITSA.

What are the filing deadlines?

HMRC has confirmed that the quarterly filing deadlines for all unincorporated businesses filing under MTD ITSA will be: 5 August, 5 November, 5 February, and 5 May. Those businesses with accounting dates of 31 March or 1, 2, 3, 4 April, will also file by these deadlines, so a business with a 31 March accounting date will have 5 extra days to file.   

The first mandated MTD submission for the first quarter to 5 July 2023 will have to reach HMRC by 5 August 2023, which is a Saturday in the Summer Bank Holiday weekend in Scotland. 

What exactly will be submitted?

The quarterly MTD ITSA submission will consist of total sales income in the period and totals of expenses in defined categories. It is expected that those categories will be aligned with expense totals currently required for the self-employed section of the self-assessment tax return. Quarterly balance sheet statements will not be required.

Any accounting adjustments, for say capital allowances or losses, will be made on the final submission for the year – known as the end of period statement (EOPS).

How will the tax position be finalised?

The EOPS will have to be submitted by 31 January following the end of the tax year. HMRC hope that tax software providers will incorporate the EOPS into the tax software which also compiles and submits the finalisation statement.

It is the finalisation statement, that calculates the tax liability for the year, which effectively replaces the SA tax return. Any sources of income which have not been reported on the quarterly MTD submissions or EOPS is included in the finalisation statement.

Taxpayers who are not within MTD ITSA, but are currently required to submit an SA return (eg to report gains or taxable interest) will continue to submit a SA tax return.

DMS Posts

Changes to the CJRS from July

In July, the UK Government will pay 70% of employees’ usual wages for the hours not worked, up to a cap of £2,187.50. In August and September, this will reduce to 60% of employees’ usual wages up to a cap of £1,875.

You will need to pay the 10% difference in July, and 20% in August and September, so that you continue to pay your furloughed employees at least 80% of their usual wages for the hours they do not work during this time, up to a cap of £2,500 per month.

You can still choose to top up your employees’ wages above the 80% level or cap for each month if you wish, at your own expense.

To help you plan ahead for future claim periods, the CJRS calculator is available to help you work out how much you can claim for employees up to the end of September. To find this and everything you need to know about the CJRS, search ‘Job Retention Scheme’ on GOV‌‌.UK.