The 2023 Autumn Statement was announced this week and, rather unusually, there are some big changes affecting self employed workers on the horizon.
The “simplification” of National Insurance Contributions (NICs) was the headliner; the changes mean most people will see a reduction in the amount of NICs they have to pay.
However, self employed workers on lower income may not benefit from the cuts immediately – more on that later.
There are also a number of other announcements affecting self employed workers, ranging from a Making Tax Digital update to changes to deductible expenses.
Not everything is fully fleshed out yet, but here’s what we know so far.
How National Insurance Contributions work
NICs for self employed workers are quite different from those paid by employees.
Currently, all employees earning over £12,570 a year have to pay Class 1 contributions, which is 12% (this will fall to 10% from the next tax year).
If your salaried income is less than £6,396 a year, you’ll be exempt from paying NICs, but you’ll also lose access to certain contributions-based state benefits, such as maternity pay and the State Pension.
To complicate things, the actual amount you pay, and whether you have to pay at all, will depend on your pay that week or month.
So if you worked more shifts than usual, you’ll have higher income that month and therefore have to pay more NICs.
But if you didn’t work enough or at all, for example if your work is seasonal, then you won’t have to pay NICs.
If you have gaps in your NIC record, you can voluntarily pay Class 3 contributions – effectively buying National Insurance credits – to fill those gaps and to ensure that you have access to contributions-based state benefits.
Meanwhile, self employed workers whose annual profits are over £12,570 pay two different types of NICs:
- Class 2 contributions, which are set at £3.45 a week
- Class 4 contributions, which are 9% on profits between £12,570 and £50,270, and 2% on profits over £50,270.
This gives self employed workers access to those contributions-based state benefits.
Those with annual profits between £6,725 and £12,570 do not have to pay NICs, but they will still earn National Insurance credits that go towards these benefits.
And those with profits below £6,725, or who have certain types of jobs, have the option to voluntarily pay NICs to get National Insurance credits as they’re not automatically awarded these.
Simplification of National Insurance Contributions
From 6 April 2024 – the next tax year – Class 4 contributions will be reduced from 9% to 8%.
Separately, Class 2 contributions will be abolished for most self employed workers.
It means those with annual profits over £6,725 will now automatically be given access to contributions-based state benefits without having to pay NICs.
However, Class 2 contributions will continue to exist for those whose annual profits are less than £6,725 but who want to earn National Insurance credits.
Yes, the lowest paid self employed workers are penalised if they want access to certain state benefits.
This, the government says, it will address through further reforms to the Class 2 contributions next year.
In total, the government says that the changes will save each self employed worker at least £192 per year.
Expansion of cash basis accounting
When you have a small business, you have a choice of two accounting methods to report your income: cash basis and accrual basis.
Cash basis is based on what you actually receive and pay out, that is, money entering or leaving the bank.
It’s simpler to work with and, in the case of self employed workers who may frequently experience late payment, offer a more realistic picture of your income.
Accrual basis tends to work with larger firms as it’s based on when invoices are issued, rather than when you receive the money.
From 6 April 2024, cash basis accounting will be assumed to be the default model for self employed workers and partnerships, which potentially means quite different profit outcomes for some businesses.
Changes to training costs
At the moment you can claim business expenses for training that helps you to improve your skills and knowledge, such as refresher courses.
The stipulation is that any course you take must be related to your business, and can’t be anything for starting a new business or expanding into a new area of business.
This leaves a lot of grey areas for what is and isn’t allowable.
As part of the Autumn Statement, the government announced that HMRC will be rewriting the guidance around training costs to offer more clarity.
Ironically the details around what changes are being made are a little vague.
The government only says this: “This will ensure that individuals can be confident that updating existing skills, or maintaining pace with technological advances or changes in industry practices, are allowable costs for tax purposes.”
My interpretation of it is that the scope of what is deductible is being opened up but that remains to be seen.
Update on Making Tax Digital
Making Tax Digital is a change that’s looming on the horizon.
It will kick in from 6 April 2026 for any self employed worker (or landlord) whose annual income is over £30,000.
The idea is that you’ll use an automated accounting software (the approved list is here) to track your income and expenses, and eventually file your tax return.
You can voluntarily sign up now if you fit the criteria, which basically means you’re beta testing the programme.
If you don’t already use an accounting software, it will mean an additional expense, albeit a tax deductible one.
In the Autumn Statement, the government said that it will be further simplifying and improving the system for Making Tax Digital, including certain design changes.
Again, details of this will be shared in due course.