April 2017 sees a raft of new tax changes affecting the self-employed, from personal allowance to inheritence.
It’s important that you understand the changes, and you may need to take measures in your business to mitigate them. Read on to find out about the 2017 self-employed tax changes.
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The major change coming into force in April is the increase in the personal allowance – that is, the point at which you start paying tax. The rate increased with the new tax year to £11,500, from £11,000 previously.
The higher rate threshold, at which tax is levied at 40 per cent, is also rising, to £45,000 from £43,000. The rate at which the 45 per cent additional rate is charged remains unchanged at £150,000.
One measure announced in the 2017 Budget, planned to be introduced in 2018, was an increase in National Insurance Contributions for the self-employed. The Chancellor said this was necessary in order to bring self-employed workers further in line with employees, and to clamp down on ‘disguised employment’.
However, in a rare u-turn, pressure from business groups and the press led the government to reverse the changes. The National Insurance rate for the self-employed will remain static in 2017 and 2018.
Inheritance tax break
In April 2017, the first phase of a new scheme of inheritance tax breaks was introduced. The intention is that, by the end of the phasing, couples will be able to pass on up to £1 million to their children free of tax.
From this month, the family home allowance will increase by £25,000 a year until April 2020, when it will reach £175,000. In addition to the normal individual allowance of £325,000 per person, this will mean that each person will be able to pass of £500,000 – or £1 million per couple.
The news is less rosy for self-employed people who own buy-to-let properties. From this month, it will no longer be possible to offset all of a landlord’s mortgage interest payments.
The annual ISA allowance increased in April 2017 to £20,000, from £15,240. Savers can choose to invest that allowance either entirely in cash ISAs, stock and shares ISAs, or a mixture of both.
If you choose to invest in stocks and shares ISAs, remember that you do not have to declare dividends or capital gains.
April 2017 also saw the introduction of the Lifetime ISA, seen in part as a new iteration of the Help to Buy ISA, for which uptake was low. The Lifetime ISA is only available to those aged between 18 and 40, but if you fit in that age bracket it may be an appealing prospect.
You can save up to £4,000 a year in the ISA, and the government will then top up your investment with an extra 25 per cent – meaning that if you save £4,000, the government will give you an extra £1,000, for a total annual investment of £5,000.
There’s one final change that was announced in 2017 and coming into force in 2018, but which self-employed people should be aware of ahead of time. The dividend allowance, which many self-employed workers use in order to take money out of their limited companies in a more tax-efficient way, is being dramatically reduced, potentially causing tax headaches from next year.
Currently, the dividend allowance is set at £5,000, meaning you get the first £5,000 in dividends tax-free, regardless of your other earnings. From 2018, however, that limit will be reduced to just £2,000, meaning that self-employed people who run their business through a limited company may need to think of other ways to draw money tax efficiently.
If you’re in any doubt about the tax changes for 2017, you should seek help from a qualified accountant.
Looking for self-employed insurance?
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