In this episode of ‘It’s a Numbers Game,’ Daniel Welling is joined by resident accountant Chas Roopra to analyse Rachel Reeve’s first budget and its implications for businesses, especially MSPs. They discuss the unchanged corporation tax rates and pension legislation, and highlight key changes like the upcoming increase in national minimum wage, unaltered tax allowances leading to a stealth tax, and adjustments to employer NI rates and allowances. The episode also covers changes to capital gains tax, specifically for business asset disposals, offering insights into tax planning opportunities for MSP owners. Key takeaways include the importance of budgeting, projecting director salaries, and understanding potential tax liabilities.
00:00 Introduction and Welcome
00:32 Overview of the Budget
01:08 Unchanged Policies
02:38 Key Changes in the Budget
05:14 Impact on Employers and Employees
10:45 Capital Gains Tax and Business Asset Disposal
16:35 Actionable Takeaways for MSP Owners
18:47 Final Thoughts and Conclusion
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Connect with Chas Roopra on LinkedIn by clicking here – https://www.linkedin.com/in/chas-roopra-44250410
Connect with Daniel Welling on LinkedIn by clicking here – https://www.linkedin.com/in/daniel-welling-54659715/
Connect with Adam Morris on LinkedIn by clicking here – linkedin.com/in/adamcmorris
Visit The MSP Finance Team website, simply click here – https://www.mspfinanceteam.com/
For more information on the Profit Protector click here: https://mspfinanceteam.com/profit-protector/
We look forward to catching up with you on the next one. Stay tuned!
Transcript:
Daniel: Welcome to It’s a Numbers Game, and thanks for joining me, Daniel Welling. on my own, today, as Adam is sunning himself in Madeira, we are a week on from, Rachel Reeve’s first budget. Slightly less eventful than the Kwasi Kwarteng budget of a few years ago, but happily, I’m not having to do a full assessment of it myself because I’m joined by our resident accountant, Chas.
Daniel: Chas, welcome to the show.
Chas: Thank you, Dan. Thank you for having me.
Daniel: And so Chas, you’ve been for the last seven days or so, eagerly, reviewing all of the notes that were released along with all of the headlines and, And there was a lot of anticipation for this budget. So, and there was a lot of topics that were talked about that would be included. Perhaps we could kick off with what hasn’t changed that we thought might.
Chas: Yeah, I think, in the weeks leading up to, the budget, there was a lot of speculation or rumours that it was going to be, quite a sort of aggressive budget in terms of tax changes. So yes, we’re looking at, things that haven’t changed initially. so one of those is, the, corporation tax rates, obviously last year or the year before they were.
Chas: they did change quite a bit in terms of we had that flat 19 percent which was then changed to this 19 to 25 percent rate which was dependent then on your the profits that your company generated so there’s been no actual changes there So that’s all as and was so that’s that and then We had some, rumours about there’s gonna be changes to the pension legislation, in terms of the, contributions that you can put into a pension.
Chas: obviously company directors can use pensions quite effectively to mitigate corporation tax. liabilities. So, there’s been no changes in the amount you can actually contribute to into a pension in a tax year. And also on the flip side of it, there’s been no changes to the, amount you can withdraw from pensions being the 25 % tax free rate.
Chas: So, all in all, some of the changes they could have made. they haven’t touched, and those ones would have actually had a, quite a big impact on businesses and individuals the like.
Daniel: Good, good to hear. And, and certainly I know, the, the pension contribution, mechanism is, is what widely used and therefore very MSP friendly in, in our community. So that’s, that’s good to know. that, that’s, remained unchanged. certainly no, no worse than it was.
Daniel: Hopefully, it will improve, more so over, over time. so, those are the sort of key headlines that didn’t change. perhaps you could walk us through three of the biggest changes then starting with the first.
Chas: so the first one I would say rather than actually a change in, the tax rates, it’s more of a change to the cost base of, business owners, IE employers, because the national minimum wage is going to go up in April. And, normally we have. Minimal sort of increases, but this share, it’s actually gonna audit share.
Chas: It’s actually gonna go up, 6% above inflation. So it’s worth, bearing that in mind that although we’re looking out for how the tax rate gonna increase, that is gonna be a, an additional cost. That if you have got employees that generally hover around that minimum wage mark, then, that’s going to have to be factored into your projections for next year in, in, in terms of what effect that would have on your overall costs.
Chas: So, yeah, although not as tax as such is going to be a cost and additional cost to businesses. That’s worth bearing that in mind. I’d say number two.again, it’s probably not a change in the rates and allowances. In fact, it’s the opposite. And you could suggest that it’s a bit of a stealth tax because there’s not really been any announcements on it.
Chas: But, it’s been worth bearing in mind, obviously, each year, inflation does increase, and it’s been increasing,more aggressively after a lot over the last few years. but the allowances or the tax allowances that everyone gets has not changed. So it’s a bit of a sneaky one really because there’s no headline there.
Chas: so they pass over it, no changes to the allowances and everyone thinks, okay, great. no, no news is good news. But actually what that means is, the more and more people are going to be. drawn into firstly the basic rate of tax where they might have been under the personal allowances before and secondly, Into the higher rates of tax.
Chas: So the 40 and 45 percent rates of tax and at the moment, I believe there’s a record amount of people falling into those higher tax bands and They call it a higher rate of tax, but sometimes, you probably argue that with, current costs and everything like that. These are not wealthy people.
Chas: They just sort of,normal workers, NHS workers or, employee really, but just been falling into the higher tax bands. So it’s just worth bearing in that in mind over the next few years, those rates are static. so more and more people. Are going to be dragged into those bands and therefore, although the rates aren’t changed, you are in effect can repay more tax as an employee.
Chas: so yeah, that, that’s, the number two one and number three one.
Daniel: and I guess, I guess just on that, it’s worth noting as well that, we’ve, cost of. Living well in inflationary pressures on spending of those gainfully employed within the MSP market,a, they,they’re going to be spending more, they’re going to be paying higher tax, which means that salary increases.
Daniel: That the MSP owner might be making are actually not necessarily going to have as much of an impact on the sort of money in the pocket of the average MSP employee at the end. So, as you say, it’s a stealth tax, but also a stealth cost to MSPs that they’re, perhaps they were thinking of a 5 percent increase.
Daniel: Well, maybe that needs to be 10 percent to give the same net effect to the, to the employee in their take home.
Chas: Yeah, absolutely. I mean, the,the employees are really only interested in the take home and, they’re only going to want to see what’s ended end up ends up in their bank account at the end. So yeah, definitely. That’s Okay, so the third change, I guess biggest change, is probably the sort of more headline one that they announced, is the change to the employer NI rates and allowances.
Chas: So this has increased from 13.8 to 15 percent. And, also they put the threshold down, which is, the amount at which your employee has to earn before you, as the employer have to start paying, employers and I previously, it was just over 9, 000, which means more and more employees or employers will have to pay, employers and I.
Chas: that said there is some good news on that front because they’ve also increased the employer allowance which is the sort of credit you get Against any employer NI bills. So previously it was £5000 so your first £5000 pounds of employer NI bills were basically wiped off of That credit has been increased now to £10000 So, it gives although more people are going to be caught by it there’s a higher allowance that you can use as a credit to offset those Employer and I bills.
Chas: So in summary, there’s gonna be some winners and losers with these changes Now if you’ve got a smallish business with not too heavy, a payroll cost or a number of staff members, then you’re probably going to be better off. And we’ve done a, an exercise just recently for one of our clients. they’ve got, there’s two directors, five employees, and, they will actually be 2000 pounds better off a year with the changes.
Chas: so for those sort of employers, you’re probably gonna be better off and that is probably gonna be the vast majority of, small businesses who, generally have, smaller payrolls. But if you do have a larger payroll, more employees or you pay higher wages, then you probably are going to see a negative effect.
Chas: now it all depends on number of employees and the amount you pay them. So it’s difficult to put a specific number on. whether it’s going to affect you or not. it’s just a case of running through the calculations, but yeah, although the headline sounds bad, it’s actually. probably beneficial to a lot of the small MSP business owners that are out there.
Chas: So worth bearing that in mind.
Daniel: And.maybe, maybe I can put you on the spot then and just ask a question around, you mentioned the threshold at which,employers and I now applies,I, I would, certainly know that a lot of MSP owners pay themselves a, a basic To effectively register for but not attract national insurance, which, is roughly 9000 and something, and,will that change have an impact on what a typical MSP director’s basic pay might be?
Chas: Yeah. And, there is some potential tax planning opportunities around that. so in specific circumstances, you might want to, Even although you’d think that actually you might as well reduce the director’s salary, so there is no employer NI, actually probably increasing the wages could have a, an effect on the eventual corporation tax rate that you’re subject to.
Chas: So, for example, if you’re, you find that your company is falling into, transcending that 19 percent and falling into some of the other tax bans, then there could be some, planning around actually increasing the, employer, the, director’s wages, where you’re using up some of that, plus potential unused employer allowance, and therefore pushing the company’s profits back down into one of the lower tax rates.
Chas: So it’s very specific because it’s going to depend on the number of, the profits you’re doing in the company and how the employees have already used up your employer allowance. So, there is a calculation we’ve done there, but definitely there’s some definitely, figures to be crunched and thoughts to be had around that.
Daniel: Okay. All right. So that’s, that’s really interesting. And,and again, I know, I know a lot of, MSP owners, would do like an annual payroll for themselves, perhaps in March. so, this change affects this tax year, or is it from next tax year?
Chas: yeah, that’s, most of the time with most things, although there is exceptions, they tend to give you a little bit of notice. So, yeah, it’s going to be starting from April 25.
Daniel: So.normal routine up to March this year and then consider the change from the following year. Okay.
Chas: That’s right.
Daniel: there’s one area that, probably caught my attention, which you’ve not mentioned yet. And again, there’s lots of lots of topics we could gone into.
Daniel: but that’s around for those MSPs that are considering a disposal of their, Yeah. Of their business. so we’ve had changes to, business asset disposal and,and,perhaps you could just talk us through some of those changes and when they would apply from.
Chas: Yeah. So obviously the three ones that I mentioned are probably the, and I say the biggest, it’s probably the ones that have impact most people, in their sort of day to day, year to year, month to month cycle. but yeah, if you’re in the position where you’re either looking to sell an asset or sell a business, then, the changes to the CGT, taxes is gonna.
Chas: Potentially affect you. So in summary, basically they’ve aligned the CGT taxes for Sales asset sales with those of property sales so in effect you’ve now got an 18 basic rate CGT tax and you’ve got 24 higher rate Which is the same as the property sales taxes, which is a bit surprising really because you although they have increased some of the Taxes on, property sales and land, et cetera.
Chas: You’d think they’re the ones they’re after and actually there’s almost as though they’re going off to the, business owners or the asset holders. maybe it’s because they’re expecting a lot of, crypto sales. So they want to cash in on that possibly. I don’t know, but,but yeah, it’s all been brought in line now and increased.
Chas: so interestingly, The effect of these changes, so the increase from 10 percent to 18%, which is a fairly decent increase, takes place immediately. so for those who are thinking of doing a quick sale to take advantage of the, the lower rate for the moment, that’s, they’re putting a spanner in the works of that.
Chas: So, so yeah, they’re going to be stuck with those new rates immediately. there has also been a change to the business asset disposal relief, which was the old entrepreneurs relief where basically if you’re selling a business in effect, Then rather than pay the higher rates of CGT, you’ve got a special rate of 10 percent subject to some qualifying conditions and that 10 percent is now increasing to 14 percent now that one isn’t immediate so that is in april.
Chas: So there is some potential if you were in the process of having some discussions about selling a business then it might be Advantageous to try and speed some of the discussions up because there is going to be a 4 percent hike to that rate in April. so yeah, changes there. so the, the motivations, who knows, but yeah, it’s, there are some changes which will affect those people that are going to be selling businesses or any other assets.
Daniel: And just for our listeners, CGT, capital gains tax, and,the, the business asset disposal, that goes to 14, does it then go up again,another level in the future, or is that to 14?
Chas: yeah, so although it’s increasing to a 14 percent from april 25 They are planning also Increasing it further in April 26. So obviously these things can change but the plan is at the moment that it increases from 10 percent to 14 percent and then again to 18 percent in April 26. So, yeah, they’re, definitely, looking to, align these , capital gains tax rates, the other rates that you have.
Chas: So the advantage of. the business asset disposal relief compared to your normal CGT relief. Although it’s still there, it’s not quite as generous as it was before.
Daniel: Yeah, and a sort of tapering off over a couple of years to hopefully not create, a rush to sell or indeed a, a barren period there thereafter. although I guess in. In real terms, if we’re talking about had you been,enjoying the benefits of, of a million pounds of entrepreneurs, business asset disposal relief, I should say, before you’d have been paying £100,000 on a million, from next year, you’ll be paying £140,000 on a million.
Daniel: And from the year after you’ll be paying £180,000 on a million. so, so yeah, therefore the, you’ve got to factor that into negotiating your sale price and perhaps, perhaps make another £40,000 or another £80,000 on the, on the deal.
Chas: Yeah, definitely. I mean, whenever there’s a tax changes or projected changes, then these can have ongoing changes to the negotiations, although there is a sort of cutoff. So if contracts are agreed prior to certain times, then you can potentially sort of have the old rates, but it all depends on how the contracts are agreed.
Chas: Yeah.
Daniel: and, there is though a limit though, isn’t there, in terms of, business asset disposal, like a lifetime, limit that you can,use that benefit.
Chas: Yeah. There’s a 1 million pound limit. So if you’re a serial. entrepreneur who buys and sells businesses and likes to take the benefit of the10 percent rate or the now increased 40 percent rate then you are there is a limit so they they will limit you to that 1 million pounds.
Chas: Yeah,
Daniel: yeah, perhaps, perhaps Rachel had, I heard about all of the M& A activity in the MSP space and that’s the, that’s the, the target thereafter, but maybe not.so, I guess just to sum up then,what actions,should the typical MSP owner be taking at this point?
Daniel: Like, what are the immediate takeaways?
Chas: so in summary I’d say first of all probably Unless you already do it’s always a good practice to do a forecasting or a budget obviously you’re going to have to factor in the additional costs of the minimum wage increases and Potential increases employers and I depending on how big your payrolls are.
Chas: so for starters, that’s always a good point to look over and, I mentioned it before anyway, but, you’re probably going to want to possibly do some projections on, what your director salary should be set at and whether there’s any benefit in increasing it. Now there’s going to be lots of variables there because it’s going to depend on what your current, personal tax return looks like, whether you’re already a high rate taxpayer or if you’re trying to keep yourself under those, I rate taxes.
Chas: but if you, in summary, if you’ve got a, if you’re just, for example, if you’ve got a 70 K profit, you’re going to be pushed into the marginal tax bands between 19 and 25%. So if you was to increase your director salary, by taking advantage of any unused personal allowance, you could potentially knock yourself back down into, or your company back down into the 19 percent corporation tax band.
Chas: so those calculations, are worth doing. obviously you can get the help of your accountant or, obviously you can approach us, but, there could be some opportunities there to, to look at.
Daniel: Very good. and of course, a shameless plug from ourselves would, would be our profit protector, tax diagnostic audit, which, effectively is a non committal, workshop, with, with yourself, Chas, looking at what, what the tax position. Has been what it’s likely to be and, and I guess identifying what,what could be done to, to optimize, the, the amount of tax paid in the forthcoming period and indeed what you could have done differently in the, in the last year.
Chas: Yep, definitely.
Daniel: Good stuff. And, and to, we’ll include a link to that, on the, on the show notes. So if anyone’s interested, they can read a bit more about it on our website. So, any final thoughts, Chaz, in terms of, overall, our view on the budget? Good, bad, indifferent.
Chas: well, I think, the weeks leading up to the budget, it seemed as though, there was a bit of a, a bit of fear mongering going on in that, everyone was really worried and the government was giving all the sort of tunes that, you’re going to be taxed left, right and center. So I think it was a case of just, prepare everyone for the worst.
Chas: And then when we get some bad news, Everyone will be relieved and won’t look so bad. So I think in summary, it could have been worse than it actually was.
Daniel: We, we’ve been, we’ve been managed here, haven’t we? you get that feeling. Yeah. and I guess one, one final thought for me is, from a, obviously it’s not just the MSPs that are affected by this budget. it’s all of their. Customers and the wider economy. so maybe any hesitation in decision making, that might have affected either project signing off or decisions being made to change from one provider to another, hopefully now with the budget behind us and the dust settled that can enable a productive trading period between now and, The inevitable slowdown, in the weeks up to Christmas, but, now’s a good time to, to get busy and, and get that pipeline closed down, I guess. Good. Chas, really appreciate your time. Been a pleasure talking to you. And, when’s the next budget, in the spring?
Chas: They normally have a spring budget as well. So I’m sure we’ll look forward to that as well.
Daniel: and hopefully they’ve not listened to this episode and getting any ideas about how to, how to make more changes against the MSP community.
Chas: Let’s hope so.
Daniel: Good stuff. Chas, thanks ever so much.
Chas: Thank you, Dan.