The key notes from the 2023 Autumn Statement

Changes to R&D relief in 2024

The revamp of R&D relief will commence from April 2024, combining the two systems and lowering the intensity threshold from 40% to 30% for SMEs with a soft landing.

This change will enable an additional 5,000 SMEs to qualify for R&D tax relief, according to the Chancellor. Rates for loss-making companies will be reduced from 25% to 19%, and the thresholds will be lowered from 40% to 30% from 1April 2024. HMRC determines R&D intensity as the proportion of an SME’s qualifying R&D expenditure relative to its total expenditure.

A one-year grace period will be introduced for companies that fall below the 30% threshold, ensuring companies relief for the following year. The Autumn Statement Green Book confirmed that the credit rate for profitable businesses will be reduced to 15%, while loss makers will be penalised with a 16.2% rate. By the 2028-2029 period, these changes are expected to cost £280m in tax relief annually.

The R&D Expenditure Credit and the SME scheme will be merged from 2024, eliminating the complex transition between the two schemes. R&D claimants will no longer be able to designate a third-party payee for the relief payment. Only the claimant will receive the tax credits, and no new assignments of the credit will be possible from 22 November for existing claims.

The government has yet to decide on the timeframe of this merged scheme, and further changes to the percentages of this new relief may seem like window-dressing. There has been significant discussion about various “reliefs”, “support”, and “funding”. It remains unclear how businesses will access the relief and how HMRC will administer it.

The decision to proceed with the reforms from April, despite limited guidance and unfinalised rules, has been criticised. The confirmation that the SME and large company R&D schemes are to be merged will receive mixed reactions from businesses. While it simplifies the process, there is still much uncertainty about who will be eligible to claim R&D under the new rules.

This will inevitably result in some significant winners and losers, with subcontractors hiring skilled R&D staff expected to lose out based on current draft rules. Some businesses will be disappointed that the government has not heeded calls for a delay in the rules to allow time for planning and preparation for what will be a significant change.

The expansion of the R&D relief for R&D intensive businesses will be welcomed by the life sciences and high tech sectors. The measure lowers the threshold for which businesses can qualify for the relief from 40% to 30% intensity.

The government announced £750m in R&D investment this year, stating that going further will ‘ensure the UK remains at the cutting edge of science, innovation and technological investment’.

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Abolishment of Class 2 NICs for Self-Employed Workers

The Chancellor has decided to eliminate Class 2 National Insurance contributions for self-employed individuals and reduce the rate of Class 4NICs.

Currently, self-employed individuals pay £3.45 per week in Class 4 NICs, which will be abolished from the new tax year starting on 6 April. ‘We will eliminate the outdated and unnecessarily complex Class 2 self-employed NICs, reforming and simplifying the tax system,’ stated Chancellor Jeremy Hunt.

Furthermore, from April 2024, Class 4 NICs for the self-employed will be reduced from 9% to 8%, and no self-employed individual will have to pay Class 2 NICs, saving the average self-employed person earning £28,200 a year £350 in 2024-25.

Class 2 NICs will be reduced to 8% on profits between £12,570 and £50,270. The rate remains at 2% on profits over £50,270. These reductions in NI – costing the Treasury £9bn of the £172bn total take from this tax – will do little to counteract the rising tide of direct taxation that has taken the overall tax burden to the highest levels in 70 years.

Hunt has favoured NI over an income tax cut for various probable reasons. NI is focused specifically on income from work, while income tax applies to a number of other sources of income, so an NI cut can be presented as an incentive and a reward to workers, while also having the benefit of being cheaper for the Treasury.

You do not pay NI on any private pension income or at all after state pension age, so that most retirees will not benefit from this cut – and so it can perhaps deflect some criticism from any perceived inter-generational “unfairness” of hiking the state pension by a hefty amount under the triple lock.

The January change will also put companies and payroll managers under pressure to implement the changes in January payrolls. While it will mean slightly more money in people’s pockets, which should help the wider economy, employers will now need to cope with more complicated payrolls, applying the new rates before the start of the new tax year, and meeting the costs of the increased Living Wage.

The Office for Budget Responsibility forecast these changes will increase the number of people in employment by 28,000 by 2028-29, alongside a further substantial economic benefit from those in work increasing their hours.

These tax cuts are part of the government’s long-term strategy for growing the economy and getting more people into work, ensuring that the UK has the labour market it needs for its future."

Full expensing made permanent

The Chancellor has announced that full expensing, a tax break for investments in IT equipment, plant, and machinery, will now be a permanent fixture, eliminating the previous uncertainty caused by its three-year limit. This move, described by Jeremy Hunt as the 'largest business tax cut in modern British history', is expected to result in an effective permanent tax cut of £11bn per year, stimulating business investment by £14bn across the forecast period and fostering economic growth.

The Treasury also plans to permanently streamline capital allowances and is considering extending full expensing to asset leasing. A technical consultation on broader changes to simplify the UK’s capital allowances legislation is also in the pipeline.

With this tax cut now permanent, the UK will maintain both the lowest headline corporation tax rate in the G7 and the most generous capital allowances in the OECD group of major advanced economies, including the United States, Japan, South Korea, and Germany, according to the Chancellor.

Full expensing reduces the cost of capital for businesses investing in qualifying plant and machinery, which increases the economy's long-run optimal capital stock and annual business investment. The Office for Budget Responsibility (OBR) predicts that this policy will boost business investment by £3bn per year. The 50% first-year allowance for special rate assets will also become permanent.

Full expensing covers a wide range of business essentials, from IT infrastructure and office furniture to certain commercial vehicles, warehouse and construction equipment, and fixtures for non-residential properties. It allows businesses to deduct the full cost of these investments immediately, rather than spreading the cost over a longer period. For instance, if a business spends £100 on new tools and machinery, it can now deduct the full £100 immediately, whereas previously, the company would have had to claim capital allowances on the £100 and spread the full tax relief over a longer period, at a rate of 18% per year.

The transition to a permanent measure has been praised for providing businesses with certainty. However, it may unintentionally slow some investment, as businesses no longer need to advance planned investment post 31 March 2026 to claim full expensing. The advance warning may help to mitigate this impact.

2% cut to National Insurance

The Chancellor has announced a 2% reduction in the employee National Insurance rate, bringing it down to 10% starting in January. This change will decrease the total tax for basic rate taxpayers to 30%. The average worker earning £35,400 a year will see an annual tax cut of £450, enhancing living standards for millions and rewarding hardwork as the government builds an economy for the future.

Jeremy Hunt, the Chancellor, stated that it was time to reduce the 'high employment taxes on 27m people working in the public and private sector who have to pay 20% income tax and 12% national insurance – I am going to cut the main 12% rate of National Insurance by 2% from 12% to 10%’. This measure is expected to cost £8.7bn in 2024-25, but the Treasury anticipates that employment will increase as a result, and some individuals will extend their working hours.

However, while the National Insurance cuts are being celebrated, the effects of fiscal drag were implemented more subtly. The cuts do not compensate for the additional tax collected on higher rate taxpayers through fiscal drag by not increasing the tax thresholds in line with inflation.

The timing of the National Insurance cut, which will be implemented from January, will affect pay packets from January onwards, suggesting a possible general election in May.

The impact of fiscal drag was echoed by several commentators. While the Chancellor has reduced National Insurance Contribution (NIC) rates for employees and the self-employed, he has chosen to leave the tax and NIC thresholds frozen. Typically, the income tax personal allowance and the basic rate limit would have increased from April 2024, inline with the 6.38% increase in the consumer price index in September 2023 from the previous year. This means that more individuals will be pulled into the taxnet and higher tax rates than they otherwise would have.

Despite the very targeted tax change, this will give employees a boost in their pay packets from the end of January. A cut in National Insurance from 12% to 10% will benefit lower and middle earners, providing a much-needed boost to take-home pay. The current system takes 12% of annual earnings between £12,570 and £50,270, so someone earning an average salary of £35,000 would save £450 a year. For someone earning £80,000 a year, they stand to save £754 a year.

Freezing of the Business Rates for Small Business

The Chancellor has announced a £4.3bn support package for small businesses over the next five years. This includes freezing the small business multiplier at 49.9p for the fourth consecutive year, while the standard multiplier will be increased to 54.6p by September. The small rate multiplier will also be adjusted to match the Consumer Price Index (CPI) inflation.

The government plans to extend the freeze on the multiplier and the 75% Retail Hospitality and Leisure relief as part of this support package. Firms bidding for large government contracts worth £5m will be required to demonstrate that they pay invoices within an average of 55 days, reducing to 45 days in April 2025 and to 30 in future years.

While the government has made several positive moves for small businesses, including freezing the small business multiplier and making full expensing permanent, it remains to be seen whether these measures will provide sufficient short-term support. Businesses are under pressure to support their employees during these challenging times, and additional government support is crucial for a growing business economy.

The decision to make the "full expensing" tax break for businesses permanent has been cautiously welcomed by the business community. This incentive encourages investment by allowing companies to deduct spending on essential assets from profits, thereby reducing their corporate tax burden. This is particularly beneficial for profitable businesses and provides a valuable opportunity for strategic tax planning, enabling businesses to optimise their investments and improve cash flow.

However, some believe that the Chancellor could have done more to support entrepreneurship, such as increasing the allowance for Entrepreneurs' Relief. This relief was previously unlimited, but has been reduced to just £1m by successive Chancellors. Policies that do not encourage entrepreneurship could potentially impoverish the country. The individuals who benefit from this relief are primarily small business owners, many of whom have worked for decades and are selling their business upon retirement.

While the 10% increase in the national living wage is beneficial for employees, it poses challenges for employers at a time when businesses are already under significant strain. Despite the cut in the employee national insurance rate, there was no corresponding cut for employers. The financial impact of the pandemic, rising energy costs, and ongoing inflationary and interest rate pressures could potentially hinder business growth.

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