On 22 November 2023, the UK government delivered the second Autumn Statement under the leadership of the Prime Minister Rishi Sunak, set out in detail by the UK’s Chancellor Jeremy Hunt. Fourteen months on from the disastrous Mini Budget of September 2023, the objective remained to regain trust, but there was also a keen focus on the next General Election, due some point before January 2025. Consequently, the Chancellor took the opportunity to demonstrate that the Government’s policies were succeeding halving inflation and as a result he was in a position to deliver the long awaited tax cuts.

In the run up to the Autumn Statement much had been said about the possible reductions in inheritance tax, a nod towards the traditionally older Conservative voters. But to the surprise of many there was no mention of the anticipated cuts on the day. The Chancellor seemed content with maintaining the triple-lock in the state pension to keep older voters onside, delivering an inflation busting 8.5% increase from April 2024.

The primary tax cuts came in the form of reductions to national insurance contributions for both self-employed and employees. The changes put money back into the pockets of workers from January 2024, no doubt to ensure it is felt by voters as soon as possible. The cut is targeted to the £12,570 to £50,270 bands. Whilst this looks positive in reality it only goes some way to counter the fiscal drag imposed in prior years by fixing thresholds. Rates and thresholds for higher earners remained unchanged so the measure is likely to have limited impact on the asset management industry, which will be much more concerned with how the measures impact the UK economy as a whole.

National Insurance Contributions

The government will introduce legislation to reduce the main rate of primary Class 1 National Insurance contributions by 2% from 12% to 10% from 6 January 2024. For the self-employed the main rate of Class 4 National Insurance contributions will be reduced by 1% from 9% to 8% from 6 April 2024.

From 6 April 2024, self-employed people with profits above £12,570 will no longer be required to pay Class 2, but will continue to receive access to contributory benefits including the state pension through a National Insurance credit. Those with profits under £6,725 who choose to pay Class 2 voluntarily to get access to contributory benefits including the state pension will continue to be able to do so.

Income Tax

The government has stated that the basic rate will remain at 20%, the higher rate at 40% and the additional rate at 45% for 2024/25. The government previously reduced the point at which individuals pay the additional rate of 45% from £150,000 to £125,140 for the current tax year and this will continue for 2024/25.

The income tax personal allowance and basic rate limit are fixed at their current levels until April 2028. They are £12,570 and £37,700 respectively. For those entitled to a full personal allowance, the point at which they will pay income tax at the higher rate will continue at £50,270.

Corporation Tax

The government has confirmed that the rates of corporation tax will remain unchanged, which means that, from April 2024, the rate will stay at 25% for companies with profits over £250,000. The 19% small profits rate will be payable by companies with profits of £50,000 or less. Companies with profits between £50,001 and £250,000 will pay tax at the main rate reduced by a marginal relief, providing a gradual increase in the effective corporation tax rate. As corporation tax due on directors’ overdrawn loan accounts is paid at the dividend upper rate, this will also remain at 33.75%.

LLP vs Ltd

UK asset managers will continue to look at the comparison in effective tax rates between LLP and Ltd structures. Rates for 2024/25 remain static, a welcome outcome after changes in recent years. The LLP remains the most beneficial for pure profit extraction, but the optionality and planning opportunities afforded by Ltd company structures continue to be appealing for mature managers.

There was no announcements in relation to the salaried and mixed member rules and we fear that the associated scrutiny placed on managers is set to continue despite the recent BlueCrest case. The widening gap between the LLP and Ltd feels ripe for filling with something equivalent to the employer’s NIC, albeit this needs to be balanced with the lack of optionality to roll-up profits under the mixed membership rules.

Dividends

The government confirmed that, from April 2024, the rates of taxation on dividend income will remain as follows:

  • Ordinary rate: 8.75%
  • Upper rate: 33.75%
  • Additional rate: 39.35%

In addition, the government will reduce the Dividend Allowance from £1,000 to £500 from April 2024.

Research and Development

The government will introduce legislation in Autumn Finance Bill 2023 to merge the current RDEC and R&D SME schemes for accounting periods beginning on or after 1 April 2024 with expenditure incurred in accounting periods beginning on or after 1 April 2024 being claimed in the merged scheme. It is hoped that this move will simplify and improve the system.

The rate offered under the merged scheme will be implemented at the current RDEC rate of 20%. The notional tax rate applied to loss-makers in the merged scheme will be lowered from 25% to 19%.

Whilst the aim of the reform is to simplify matters, the continuous changes to the regime will frustrate businesses that have invested in multi-year R&D projects who may need to review their position.

A number of other changes will apply to the new regime from April 2024, including that R&D claimants will no longer be able to nominate a third-party payee for R&D tax credit payments, subject to limited exceptions. In addition, no new assignments of R&D tax credits will be possible from 22 November 2023, meaning that, in most circumstances, payments of R&D tax reliefs will be paid directly to the company that claims for the R&D.

Transfer Pricing

There were no specific announcements on transfer pricing following a consultation earlier in the year in relation to the reform of UK legislation relating to transfer pricing, permanent establishments and Diverted Profits Tax. That consultation ended in August 2023 and HMRC/HMT have continued to engage with industry as to how best these should be developed. Of particular interest for asset managers would be a possible change to the investment management exemption (IME), which was considered but we understand material changes are unlikely.

It should also be noted that from April 2023, large multinational businesses operating in the UK have been required to keep and retain transfer pricing documentation in a prescribed and standardised format, set out in the OECD’s Transfer Pricing Guidelines (Master File and Local File). In practice this should only hit a minority of the asset management industry as the requirement is expected to align with the Country-by-Country Reporting (CbCR) regime that applies to groups with a consolidated group revenue of more than €750 million. However managers are increasingly restructuring their transfer pricing documentation in the new format to align with requirements in other jurisdictions. Regardless of size, best practice is that all asset managers should maintain and document an OECD compliant transfer pricing policy given the potential interaction with the IME and disguised investment management fee legislation.

OECD Pillar 2

As announced previously, the government have implemented the globally agreed G20-OECD Inclusive Framework Pillar 2 in the UK. For accounting periods beginning on or after 31 December 2023 the government will:

  • Introduce an Income Inclusion Rule (IIR) which will require large UK headquartered multinational groups to pay a top-up tax where their foreign operations have an effective tax rate of less than 15%
  • Introduce a supplementary Qualified Domestic Minimum Top-up Tax (QDMTT) rule which will require large groups, including those operating exclusively in the UK, to pay a top-up tax where their UK operations have an effective tax rate of less than 15%

Both the IIR and QDMTT will incorporate the substance based income exclusion that formed part of the G20-OECD agreement.

These changes represent a fundamental shift in global taxation aimed at international structures exploiting low tax jurisdictions with the UK expecting to raise an additional £2 billion per annum. The measure aligns with the CbCR regime, meaning most asset managers in the UK should not be impacted, however potential application to fund structures will need to be considered and any associated carve outs.

In the Autumn Statement the government announced that a future Finance Bill will amend the multinational top-up tax to introduce the Undertaxed Profits Rule (UTPR). This is the backstop rule in Pillar 2.

Capital Allowances

The new Full Expensing rules for companies allow a 100% write-off on qualifying expenditure on most plant and machinery (excluding cars) as long as it is unused and not second-hand. The rules were originally designed to be effective for expenditure incurred on or after 1 April 2023 but before 1 April 2026. Similar rules apply to integral features and long life assets at a rate of 50%. The government has announced that both allowances will now be made permanent.

The Annual Investment Allowance, which gives a 100% write-off on certain types of plant and machinery, remains at £1 million per 12-month period.

REITs

Further to the publication of draft legislation on 18 July 2023, the government will introduce legislation in Autumn Finance Bill 2023 to make amendments to the rules for Real Estate Investment Trusts (REITs) to enhance the competitiveness of the regime. The changes will generally take effect from the date of Royal Assent to Autumn Finance Bill 2023, with the exception of two of the amendments which will be treated as always having had effect and an amendment which will apply for accounting periods ending on or after 1 April 2023.

IR35 Off-payroll Workers

The government will introduce legislation in Autumn Finance Bill 2023 to enable HMRC to reduce the PAYE liability of a deemed employer, where that engagement was incorrectly treated as self-employed for tax purposes. This would account for tax and National Insurance contributions already paid by a worker and their intermediary on payments received from an off-payroll working engagement. The changes will take effect from 6 April 2024 and will be welcomed by employers as this mitigates potential costs involved with making such an error.

VAT

The VAT registration and deregistration thresholds will not change for a further period of two years from 1 April 2024, staying at £85,000 and £83,000 respectively. The industry remains hopeful progress can be made on VAT in relation to investment management fees to support UK based fund vehicles.

Making Tax Digital

The government has announced the outcome of the review into the impact of Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) on small businesses which includes maintaining the current MTD threshold at £30,000 and design changes to simplify and improve the system. These changes will take effect from April 2026. The government will also ensure taxpayers who join MTD from 6 April 2024 are subject to the government’s new penalty regime for the late filing of tax returns and late payment of tax.

Additional Data Collection

As announced previously employers, company directors, and the self-employed will be required to provide new or improved data to HMRC to enable better outcomes for citizens and businesses.

Through PAYE reporting, employers will be required to provide data on employee hours paid, and through self-assessment returns taxpayers will be required to provide dividend income and the percentage share from shareholders in owner-managed businesses separately to other dividend income, and, for trading businesses, the start and end dates of self-employment. Following further technical consultation, regulations will be laid in spring 2024, with changes taking effect from the tax year 2025 to 2026. It is not yet entirely clear the purpose of these measures but the collection of additional data is likely to be used to better target enquiries.

Pensions

A number of changes were made to the tax regime for pensions for 2023/24 and these include the following, which will remain at their 2023/24 levels for 2024/25:

  • The Annual Allowance (AA) is £60,000.
  • Individuals who have ‘threshold income’ for a tax year of greater than £200,000 have their AA for that tax year restricted. It is reduced by £1 for every £2 of ‘adjusted income’ over £260,000, to a minimum AA of £10,000.
  • No Lifetime Allowance (LA) charge.

In addition, as previously announced the LA of £1,073,100 will be abolished from 2024/25. Changes will be made to clarify the taxation of lump sums and lump sum death benefits, and the application of protections, as well as the tax treatment for overseas pensions, transitional arrangements, and reporting requirements.

Capital Gains

The capital gains tax annual exempt amount will be reduced from £6,000 to £3,000 from April 2024. This policy was announced previously but continues to see the slow erosion to tax free amounts.

Inheritance Tax

The inheritance tax nil-rate bands will stay fixed at their current levels until April 2028. The nil-rate band will continue at £325,000, the residence nil-rate band will continue at £175,000 and the residence nil-rate band taper will continue to start at £2 million.

ISAs

The adult ISA annual subscription limit for 2024/25 will remain unchanged at £20,000.

The annual subscription limit for Junior ISAs for 2024/25 will remain unchanged at £9,000.

The annual subscription limit for Lifetime ISAs for 2024/25 will remain unchanged at £4,000.

To widen the scope of investments the government will:

  • allow Long-Term Asset Funds to be permitted investments in the Innovative Finance ISA, from 6 April 2024;
  • allow open-ended property funds with extended notice periods to be permitted investments in the Innovative Finance ISA, from 6 April 2024; and
  • engage with the finance industry on allowing certain fractional shares contracts to become permitted ISA investments.

For those measures that take effect from 6 April 2024 a statutory instrument will follow early next year.

However, a number of changes will be made to allow multiple subscriptions to ISAs of the same type every year and to allow partial transfers of ISA funds in-year between providers from April 2024.