We are sure that you will have heard about the mini-budget by this point. It is dominating the news cycles, social media feeds and people all over the country are talking about it wherever you go. Officially called the Growth Plan, the mini-budget is the biggest package of tax cuts in recent years. After the announcement on the 23rd September, the pound plummeted to its lowest point in nearly half a century, a record low against the dollar. Thousands of mortgage products were withdrawn with the skyrocketing interest rates and pension schemes were suddenly worth less.In an unprecedented move, the Bank of England stepped in the other week an attempt to stabilise the market by buying up long term government bonds as pension schemes rushed to raise funds. However, this is due to end shortly. The Bank of England has said that they are not averse to adjusting interest rates as the situation progresses. We’ve been discussing what this means for legal consultants and self-employed lawyers here at Carbon.
What are the main takeaways of the mini-budget for self-employed lawyers?
- Income tax cuts. The rate will fall from 20% to 19% and the government made a U-turn on the additional tax rate which will now remain at 45%. This change has allowed the pound to return to its pre mini-budget level against the dollar.
- Dividend tax rates: The 1.25% increase to Dividend Tax will be removed next April. Dividends will once again be taxed at 7.5% (basic rate) 32.5% (higher rate) and 38.1% (additional rate) respectively.
- National Insurance/Health and Social Care Levy – the levy has now been scrapped. National Insurance (NI) 1.25% increase will be reversed in November and the NI rates will now be 12% (Class 1: Employee’s NI), 13.8% (Class 1: Employer’s NI) and 9% for Class 4 (Self-Employed NI). Class 2 for the self-employed was not affected by the last increase and therefore will not change this time round either.
- Corporation Tax – this was expected to rise next April to 25% for companies reporting profits over 250,000. This will no longer happen and will remain at 19%.
- IR35 – probably one of the most important points for those in the legal consultancy industry, and a complex one at that. The mini-budget states that it is now the responsibility of the consultant rather than the end client to determine IR35 status. We will discuss this in more detail further on.
- Annual Investment Allowance – the threshold was temporarily increased to £1m during the pandemic but this has now been confirmed as a permanent change and will not be reduced next March as previously planned.
- Stamp Duty Land Tax (SDLT) – it is important to note that this change is only applicable to England and Northern Ireland. The threshold for paying SDLT has been increased from 125,000 to 250,000 on residential properties (300,000-425,000 for first time buyers).
- UK investment zones – support has been announced to help growth in specific areas which is expected to include 100% business rates relief, enhanced capital allowances, stamp duty relief and national insurance relief for employers.
- Energy crisis – a cap of household energy bills has been announced at £2,500 over the next two years and there will be discounted unit prices on gas and electricity for those on non-domestic contracts for six months. There will be a cap of £211 applied to electricity prices, and a cap of £75 applied to gas prices.
What does this mean for how I run my legal consultancy practice?
Budgeting for self-employed lawyers will certainly be a growing area for attention following the announcement. Some changes to focus on specifically will be for lawyers who pay themselves via company dividends in addition to their salary, will benefit from the tax cuts.
In relation to National Insurance (NI), the Lower Profits Limit (LPL), when you start to pay Class 2 and Class NI, has been increased. As with the primary threshold for employees, this has risen to £12,570 so from next year self-employed lawyers will benefit. However, as the self-employed pay tax and NI at the end of a tax year, the threshold for this year will remain at an ‘annualised amount’ of £11,908, even when the NI rate is lowered in November and the reduction in NI will not be backdated.
The changes to IR35, do not mean that IR35 is being scrapped, just that the onus is once again on the contractor rather than the client in regards to employment status and paying the appropriate amount of tax and NI. Whilst this change may have come across as “bad news” for self-employed legal consultants who may have believed this was the platform’s issue, the reality is that this was never implemented, so it continues to be the legal consultant’s risk. The status quo never changed. At Carbon we have worked with IR35 and self-employment since 1998 and have a deep understanding of these issues and how they are evolving. We recommend all legal consultants ensure they understand the contract with the platform or platforms they work for to ensure clarity over this point.
If you fall into one of the New UK Investment Zones, you could stand to benefit from the relief packages announced as part of the Growth Plan. Self employed lawyers businesses, should they fall into one of these zones, can also take advantage of 100% business rates relief, enhanced capital allowances and stamp duty and NI relief.
What does this mean for my clients as a self-employed lawyer?
There are some items to consider from a client perspective. If you are a lawyer advising on matters relating to property for example, does the decrease in SDLT impact your clients or does the rise in interest rates negate this? If clients in areas that successfully apply to the Investment Zones initiative, they can benefit from tax incentives and looser planning rules.
The permanent increase to Annual Investment Allowance (AIA) will also benefit self-employed lawyers and their businesses. The AIA allows businesses to claim tax relief on long term assets, providing you expect to stay in business longer than the next 12 month period. AIA states that you can deduct an entire asset’s value from your profits before tax. This means that you will pay less tax in the financial year in which you made the investment. The change announced in the mini-budget, means that you will continue to be able to claim up to the maximum limit of £1m in a year, a limit that was initially set as a temporary measure for Covid relief.
There have also been changes to the Seed Enterprise Investment Scheme (SEIS), a scheme designed to assist UK start up businesses get access to finance. The current annual investor limit has been increased from £100,000 to £200,000 and the gross asset limit has also risen to £350,000. Both of these changes will come into effect next April.
What support can Carbon Law Partners provide for their partners?
Here at Carbon, you have all the support you need to flourish. When you join, you will receive administrative, financial, operational, logistical and marketing support with a personal flair. We believe in our partners getting a larger share of the financial pie with up to 70% on their fee split.We believe in sharing our success. We give our lawyers the option of owning shares in the firm which enables everyone to benefit from the success that Carbon generates. Your legal practice has value at Carbon. When one of our partners decides to retire, we encourage the transference of their practice to another partner with Carbon. This means that you never have to throw away capital value. Put simply, you can enjoy all the support of a traditional law firm with the ability to earn more. At Carbon, you can forget about running a business, focus on giving quality legal advice to your clients and build capital value. That’s what Carbon is all about. Take the leap today, you’ll wish you had done it sooner.