The National Insurance Contributions (Reductions in Rates) Bill has already had its second reading in the House of Lords as the Government has requested that Parliament fast track the legislation. The need for speed stems from the 6 January 2024 start date for the primary Class 1 NIC reduction, a timing that many see as politically motivated. As the Bill’s explanatory note wryly observes, ‘It is important for …employers to have as much time as possible to implement the changes to their payroll software ahead of the rate reduction.’

Aside from the headlined ‘tax cuts’, the NIC changes have several indirect effects which have received little attention:

Directors’ NICs

The calculation of NICs for directors is based on their full tax year income. This means that, as happened in 2022/23 when there was a NICs cut, a pro-rata Class 1 NICs rate will apply in 2023/24. For this tax year that will mean a main primary rate of 11.5%, as set out in para 1 of the Schedule to the Bill. Any director thinking that, by deferring payment to 6 January, they will pay 10% NICs on a bonus falling with the main primary NICs band (£12,570 to £50,270) is wrong. To get the full benefit of the lower NICs rate, deferment would need to be until 6 April 2024…at which point other considerations may come into play.

The 11.5% is simply calculated as 12% x ¾ + 10% x ¼.

As both the secondary Class 1 NIC rate and the 2% primary Class 1 NIC rate on earnings above the upper earnings limit are unchanged, no pro-rating applies to these.

Bonus v dividend

There is no change in the numbers where the marginal income tax rate is above basic rate as the relevant marginal NIC rate stays at 2%. At a marginal basic rate, the bonus/salary option becomes slightly less unattractive than a dividend but remains well adrift. For example, in 2024/25, taking the highest marginal corporation tax rate, the numbers look like this:

	Bonus	Dividend
Gross profit	1,000.00	1,000.00
Corporation tax (26.5%)	N/A	(265.00)
Dividend payable	N/A	735.00
Employer’s NIC (13.8%)	(121.27)	N/A
Bonus	878.73	N/A
Employee’s NIC (10%)	(87.87)	N/A
Income tax (20%/8.75%)	(175.75)	(64.31)
Net Income	615.11	670.69

Incorporation v self-employment

Our last Bulletin on the question of incorporation made clear that the higher corporation tax rate environment had reduced the tax appeal of incorporation. The calculations for this adopted the assumptions that:

• £9,100 (the employer NIC secondary threshold) would be drawn as salary from the company, as this would be NIC-free for the company and its director; and
• The entire balance of gross profit would be subject to corporation tax and drawn as dividends; and
• The dividend allowance (falling to just £500 in 2024/25, remember) was not available.

These assumptions mean that the employee NIC cut is irrelevant. However, on the self-employed side, there are two relevant NIC reductions:

• An end to Class 2 NIC contributions, worth £179.40 a year; and
• A reduction in the Class 4 NIC rate from 9% to 8%, worth a maximum of £377 a year where profits are at least £50,270.

As a result, the incorporation advantage can be up to £556.40 a year less in 2024/25 than 2023/24. Reworking the graph in the previous Bulletin produces this pattern.

The two bands in which incorporation has a theoretical tax advantage have narrowed because of the NICs savings on self-employment, with the maximum gain about £1,600 at £60,000 of profit. Both the bands favoring incorporation have their roots in the absence of grossing up for dividend income. In the first band, that means income attracting higher rate tax arrives at a greater gross profit level. For the second, the absence of grossing up pushes out the point at which the personal allowance begins to be phased out.

Comment

The waning attraction of incorporation will not disappoint HMRC, as it continues its off-payroll working (IR35) battles. It may also encourage some users of personal companies to review the alternative of self-employment (although this needs to also consider the non-fiscal beneficial aspects of trading as a company).

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The Society of Trust and Estate Practitioners (STEP)’s third edition of their standard and special provisions for wills and trust instruments subject to the law of England and Wales (SSP3), which was published on 2 November 2023.

Any adviser involved in estate planning will inevitably see a copy of their client’s will. On many occasions, the will includes a statement that “the STEP Standard Provisions (1st or 2nd edition) shall apply”. Similar wording can be incorporated in a trust deed. It is important to understand what this means and be familiar with the provisions.

The STEP Standard Provisions are a set of ready-made clauses that can be inserted into a will or a trust. These clauses provide protections and powers that enable the executors or trustees to effectively deal with the estate/trust funds.

Any properly drafted will or trust deed must contain a large amount of text dealing with routine administration matters. It had been necessary to set this out in full in each such document until STEP condensed this material into its STEP Standard Provisions.

The STEP provisions are widely used by solicitors and, of course, others drafting wills.

The Provisions were originally published in 1992 (1^st edition). An update was published in 2011 (2nd edition), following changes in trust and tax law.

In 2023, the practice direction was approved by the Chief Chancery Master of the Family Division. This allowed the STEP Standard Provisions (3rd Edition) to be incorporated into wills by reference.

The main changes from the 2nd edition are as follows:

1. Updating of the clauses on trust corporations – now reflecting the usual terms and conditions of trust corporations.
2. Powers of maintenance and advancement – updated to reflect statutory changes made in 2014 to section 32 Trustee Act 1925 that broadened trustee powers over the entire interest of a beneficiary.
3. Powers over capital when a minor or beneficiary without capacity is involved – this reflects the general practice of trustees needing to transfer assets to the parents of a beneficiary under 18 or to pay funds on behalf of or to a person that the trustees consider has a care or financial responsibility for a beneficiary who may lack capacity.
4. Appropriation values – under general law the valuation for appropriation should be made at the time of the appropriation. The SSP2 allowed executors to use a valuation at the date of death instead. This has now been removed.

 Comment

Any adviser advising on estate matters should review their clients’ wills.

Wills using the earlier editions of the provisions remain valid and in force, so it may be necessary to refer to those earlier editions. However, on any next update of the will, it would be sensible to ensure that the latest edition of the Provisions is incorporated.

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The Leasehold and Freehold Reform Bill, which was introduced to Parliament on 27 November 2023.

Back on 7 January 2021, Robert Jenrick, the then Housing Secretary, announced that leasehold reform would be tackled through two pieces of legislation

The first part, The Leasehold Reform (Ground Rent) Act 2022, came into force on 30 June 2022. And the Government committed to action on the second part in February of this year. Please see our earlier Bulletin.

The long-awaited second part, the Leasehold and Freehold Reform Bill has now been published. The Government says that this Bill will:

• Increase the standard lease extension term for houses and flats to 990-years (up from 90 years in flats, and 50 years in houses), with ground rent reduced to a peppercorn (zero financial value) upon payment of a premium. This will make sure that leaseholders can enjoy secure, ground rent-free ownership of their properties for years to come, without the hassle and expense of repeated lease extensions.
  
• Remove the so-called ‘marriage value’, which makes it more expensive to extend leases when they’re close to expiry.
  
• Remove the requirement for a new leaseholder to have owned their house or flat for two years before they can benefit from these changes – so that more leaseholders can exercise their right to the security of freehold ownership or a 990-year lease extension as soon as possible.
  
• Increase the 25% ‘non-residential’ limit preventing leaseholders in buildings with a mixture of homes and other uses such as shops and offices, from buying their freehold or taking over management of their buildings – to allow leaseholders in buildings with up to 50% non-residential floorspace to buy their freehold or take over its management.
  
• Make buying or selling a leasehold property quicker and easier by setting a maximum time and fee for the provision of information required to make a sale (such as building insurance or financial records) to a leaseholder by their freeholder (known as ‘landlords’).
  
• Require transparency over leaseholders’ service charges – so all leaseholders receive better transparency over the costs they are being charged by their freeholder or managing agent in a standardised comparable format and can scrutinise and better challenge them if they are unreasonable.
  
• Replace buildings insurance commissions for managing agents, landlords and freeholders with transparent administration fees – to stop leaseholders being charged exorbitant, opaque commissions on top of their premiums.
  
• Extend access to “redress” schemes for leaseholders to challenge poor practice. We will require freeholders who manage their property to belong to a redress scheme so leaseholders can challenge them if needed.
  
• Scrap the presumption for leaseholders to pay their freeholders’ legal costs when challenging poor practice. 
  
• Grant freehold homeowners on private and mixed tenure estates the same rights of redress as leaseholders – by extending equivalent rights to transparency over their estate charges and to challenge the charges they pay by taking a case to a Tribunal, just like existing leaseholders.
  
• Build on the legislation brought forward by the Building Safety Act 2022, ensuring freeholders and developers are unable to escape their liabilities to fund building remediation work – protecting leaseholders by extending the measures in the Building Safety Act 2022 to ensure it operates as intended.
  
• Ban the sale of new leasehold houses so that – other than in exceptional circumstances – every new house in England and Wales will be freehold from the outset.
  

As announced in the King’s Speech, the Government will introduce some measures at first reading and others as amendments as the Bill makes its way through Parliament to deliver on the full range of commitments. These will include measures to amend the Building Safety Act 2022 to make it easier to ensure that those who caused building-safety defects in enfranchised buildings are made to pay, and that the leaseholder protections are not unfairly weighted against those who own properties jointly.

Earlier this month, the Government also published a consultation on capping existing ground rents, to ensure that all leaseholders are protected from making payments that require no service or benefit in return, have no requirement to be reasonable, and can cause issues when people want to sell their properties. Subject to that consultation, the Government will look to introduce a cap through the Leasehold and Freehold Reform Bill.

The Bill will extend and apply to England and Wales.

The Government says that these changes will, amongst other things, make it significantly cheaper for leaseholders to extend their leases. An example given previously by Government was that a young first-time buyer in a £250,000 leasehold flat in Birmingham with 76 years left on the lease, who would currently have to pay around £16,000 to extend the lease plus around £10,000 to cover their costs and the freeholder’s costs, would, under these reforms, now only pay around £9,000 plus their own legal costs for a 990-year extension – a saving of over £10,000.


Comment

Housing Secretary, Michael Gove, has reportedly said that he is confident that the Bill will pass into law before the general election. We will keep you up to date on any developments.

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