If you are self-employed, then you will understand that you will have certain tax and National Insurance reporting responsibilities.
Keeping track of any new changes in tax laws can be tricky, especially when you have a business to run and are busy keeping on top of all your day to day essential tasks just to keep your business ticking over.
Changes in tax rules can have a substantial impact on your bottom line and what you can earn from your business. Fall foul of any new changes, or fail to report accurate information can see you being out of pocket with severe fines or penalties imposed by HMRC. So it is important that you keep up to date with the latest legislation.
Let’s take a look at some important tax changes for this tax year 2018-19 and how they might affect you and your business.
Tax-free dividend allowances
It is very common for single self-employed people to go through the company formation process so that they can set up a limited company. This then allows you to pay yourself a salary and claim work-related expenses. Then they can go on to pay themselves a dividend from the company profits.
Doing this allows you to minimise your income by keeping your salary low, in some cases paying yourself below the personal allowance level. This means not having to pay income tax on your salary if it is below £11,850. You could then take a dividend payment from your company profits to top up your income. However, from 6th April this year (2018), new tax rules mean the amount that you are allowed to earn from dividends before paying tax, known as the dividend allowance, is set to be reduced.
In previous years you were allowed to draw up to £5,000 a year in dividend income before needing to pay tax on it to HMRC. However, this amount has now been reduced to just £2,000. This means those who took a low salary and a dividend top up may now need to pay tax on their earnings if they want to continue to take the same amount of money out of their company.
National Insurance Contributions
All self-employed people have to pay Class 2 NI contributions on their income above a certain level. For 2018-19, the new threshold for Class 2 payments is now £6,205 a year, this has gone up from £6,025 in the previous tax year. So, should you actually earn less than £6,205 in this tax year, you will not need to pay any National Insurance contributions at all. However, you can choose to make voluntary Class 2 National Insurance Contributions to help keep your state pension topped up.
If you pay Class 4 National Insurance contributions, then this has also risen from £8,164 last year to £8,424 this year.
The Class 2 NI contributions will rise from £2.85 per week to £2.95 per week. However, with the rise in the Class 2 threshold, most lower-earners will end up paying a little bit less NI, while higher-earners will end up paying a little more due to the increased rate. So for example if you earn £20,000, you will pay £1,195.24 National Insurance for the 2018-2019 tax year, which is £18 less than what you paid last year.
Capital Gains Tax Allowance
This years sees an increase in the capital gains tax allowance, going from £11,300 to £11,700. This means that the tax-free profit you are able to earn from selling assets will increase. This means that you will get a smaller tax bill this year if you are planning to sell off any valuable company assets that qualify for capital gains tax.
Personal tax allowance
The self-employed are also able to benefit from personal allowance increases each year, just like their employed counterparts. Your personal allowance is how much you can earn from work before you have to pay income tax. The personal allowance tends to rise a little each year, and this year the threshold has risen from £11,500 last year to £11,850 this year.
For England, Wales and Northern Ireland (except Scotland), new higher rate tax thresholds now apply. This means that if you earn above £46,350, you will need to pay a higher rate of income tax.
The threshold has actually increased from £45,000 in the last tax year. Scotland’s tax rates work a little differently with five tax brackets that a person can fall into. Click here to find more information.
HMRC Making Tax Digital
HMRC are already running a pilot scheme for making tax digital. It is planned that the self-employed and small business owners will all be able to use a digital monthly or quarterly income reporting system online. The scheme is called ‘Making Tax Digital‘, and rather than having to submit a single tax return each year, you can go online to report earnings more regularly. This will help you stay in control of your tax liabilities and you will be able to plan your tax payments through regular updated tax assessments.
The full roll-out has been delayed until 2020 to allow for sole traders and small businesses to prepare for the upcoming changes, but you can sign up online to take part in the pilot scheme and access the necessary software needed through the HMRC website.
RPI to CPI switch
Business rates up until now have been calculated and increased in line with September’s Retail Prices Index (RPI). However, this is to change with business rates now being tied to the Consumer Prices Index (CPI) instead. What this means for your business is that you are likely to benefit from lower business rates as a result because the Consumer Price Index is usually lower than the Retail Price Index, but not by much.
Last year the government introduced new tax reforms within the public sector to ensure compliance with IR35. This means companies that miss-classify their employees as self-employed contractors to avoid paying tax would be hit hard with penalties. It now looks like the government intends to extend their IR35 crackdown to include the private sector this year too.
Under the IR35 regulations, those employed as contractors and forced to register as self-employed before being hired, can challenge this position. So if you are a freelancer or contractor and work solely for one company, you should check whether IR35 could apply to you.
VAT Threshold Changes
There has been some speculation in recent months that the government may lower the VAT threshold for small businesses. So far the threshold will remain at £85,000 for two years from 1 April 2018. The government estimate that about 6,000 small businesses will surpass this threshold for this tax year.
If you employ staff, then from April there has been a rise in minimum pension contributions. Bosses will now need to make a 2% mandatory contribution into your employee’s pension fund. This is an increase of 1% from last year. Remember that pension contributions are set to rise again next April to 3%.
National Living Wage
If you employ staff within your business, then you should already be aware that the National Living Wage has increased this April from £7.50 per hour to £7.83 per hour. This means of course that you need to raise the wages of any staff aged over 25 that are paid at minimum wage rates.