Everything to take note of in the new tax year

We’re now one week into the new tax year, and whilst there have been no major changes – such as the introduction of a new tax – there is still plenty for the self-employed to take note of.

Income Tax

If you’re a sole trader, you will be celebrating the increases to the Personal Allowance and the higher rate tax threshold. The personal allowance has increased from £11,500 to £11,850 while the higher rate threshold has increased from £45,000 to £46,350.

Both increases are in line with inflation which means that, whilst the amount of tax you pay is reduced, it is counter-balanced by your reduced purchasing power due to the yearly average of three per cent inflation.

National Insurance Contributions (NICs)

Self-employed people who earn more than £6,205 per year must pay Class 2 NICs. This is a flat rate of £2.95 a week and equates to £153.40 over a year. Class 2 NICs are used to complete your national insurance record and, currently, 35 years of NICs qualifies you for the maximum state pension.

Class 2 NICs were scheduled to be abolished, though this has now been delayed. The government remains committed to abolishing Class 2 NICs however, and this is expected from the 2019/2020 tax year.

For self-employed workers who earn more than £8,424 per year, Class 4 NICs are payable – an increase from £8,164 last year. Class 4 NICs are payable at a rate of nine per cent for anyone earning between £8,424 and £46,350. Class 4 NICs is charged at two per cent on earnings over £46,350.

Dividend Taxes

Since the Dividend Allowance was introduced, it has altered a number of times. Initially, replacing the Dividend Tax Credit, the allowance was set at £5,000. However, in the 2017 Spring Budget the Chancellor announced that the allowance would be cut to £2,000 and this has now come into force.

Once you have earned over £2,000 in dividends, you will be taxed at a rate of seven per cent, 32.5 per cent or 38.1 per cent, depending on your marginal rate of Income Tax.

Capital Gains Tax

Capital Gains Tax may be due when you wind up or sell your business and is levied at a rate of 10 or 20 per cent, depending on your marginal rate of Income Tax. The only exception occurs for people selling properties, which results in a tax of 18 or 28 per cent.

Like the Personal Allowance, the Capital Gains Allowance has increased as well so you can now make a capital gain of £11,700 before any tax is due.

Business Rates

If you operate as a brick and mortar store, you will have been paying Business Rates to your local authority. Previously, Business Rates increased in line with the Retail Prices Index (RPI). However, they will now increase in line with the Consumer Prices Index (CPI). This should benefit business owners as CPI is typically lower than RPI.

Students

One of the fastest growing segments of the self-employed is those aged between 18 and 24 – many of whom will have been subjected to £9,000 university tuition fees.

From the start of the new tax year, the repayment threshold has been increased from £21,000 to £25,000. Repayments are made at a rate of nine per cent on earnings over £25,000.

Will there be any more changes?

IPSE is working hard on a series of consultations to ensure that no further damaging tax changes are implemented. This includes highlighting the damage the IR35 changes have caused in the public sector. With the Chancellor promising to only have one fiscal event per year, we will have to wait until his Autumn Budget for further clarification on tax policy.

Meet the author

Tom Purvis

Political and Economic Adviser