As someone who’s self-employed, you need to know about anything that might affect your earnings. To help you out, we’ve put together a list of all the tax changes for 2018-19 you need get to grips with.
- Self Assessment tax returns: a comprehensive guide
- The small business guide to Corporation Tax rates
- How does VAT affect small businesses?
- What is business insurance?
The 2018-19 tax year started on 6 April 2018 – and, as with any new tax year, there are a host of tax changes to wrap your head around.
From the positive to the negative, read on for our breakdown of all the new rules.
1. Personal allowance and higher rate increases
For 2018-19, the personal allowance has increased from £11,500 to £11,850. Your personal allowance dictates how much you can earn before you start paying income tax.
The higher rate threshold is also increasing, from £45,000 to £46,350. This is the threshold at which you start paying the higher rate of tax on your profits.
The additional rate threshold remains unchanged at £150,000.
Check out our guide to income tax for the self-employed for more information.
Income tax in Scotland works differently, with five rates of tax to pay, between 19 per cent and 46 per cent. The starter rate of 19 per cent is applicable to income between £11,850 and £13,850.
As you’re self-employed, you pay tax on your profits, which is what you’ve earned after your expenses are deducted. Find out what you can claim as self-employed tax deductible expenses.
2. A big cut in the dividend allowance
A headline 2018-19 tax change for the self-employed is the cut in the dividend allowance. This is part of the government’s attempt to bring the tax treatment of the employed, self-employed, and directors/shareholders in line with each other.
If you pay yourself a dividend through your company, the allowance is dropping from £5,000 to £2,000. This means you’ll get to earn £2,000 as dividends before paying tax.
The rate of dividend tax you pay depends on which tax band the first £2,000 falls into. Read more about dividend tax for the self-employed.
3. Class 2 and Class 4 thresholds increase
If you’re self-employed and make more than £6,205 a year, you need to pay Class 2 National Insurance contributions. This is up from £6,025 last tax year.
The flat rate of Class 2 contributions has also increased to £2.95 per week from £2.85 per week.
These changes mean that people who earn less will pay a bit less National Insurance, while people who earn more will pay a bit more.
The threshold for Class 4 contributions has also gone up from £8,164 to £8,424. If you make more than that a year, you’ll pay 9 per cent of profits between £8,424 and £46,350 per year, plus 2 per cent of what you earn above that.
4. An increase in the Capital Gains Tax allowance
In 2018-19, you can make £11,700 tax-free when you sell assets that qualify for Capital Gains Tax, up from £11,300 last year.
Lower rate taxpayers pay 10 per cent of Capital Gains Tax on profits above the allowance. Higher and additional rate taxpayers pay 20 per cent.
These rates hold true for everybody other than buy-to-let investors or those with a second home – the rate for selling a second property is 18 per cent for basic-rate taxpayers, and 28 per cent for additional-rate taxpayers.
Read more about Capital Gains Tax for rental properties.
5. Your ISA allowance
Your ISA allowance remains £20,000 for the 2018-19 tax year. This is the amount you can save into an ISA tax-free. You can choose to invest that allowance either entirely in cash ISAs, stock and shares ISAs, or a mixture of both.
And don’t forget about the Personal Savings Allowance, which lets basic-rate taxpayers earn up to £1,000 in savings income-tax free – even outside of wrappers like ISAs.
6. You can join the Making Tax Digital pilot
In March 2018, HMRC rolled out an invitation for sole traders to join its Making Tax Digital pilot, ahead of its full introduction for all taxes in 2020.
The pilot gives the self-employed the chance to keep records digitally, by submitting regular Income Tax updates, rather than completing an annual Self Assessment tax return.
Making Tax Digital has had a chequered history – the Federation of Small Businesses last year estimated that the scheme could cost small businesses £2,770 annually. By launching a pilot, HMRC likely hopes that confidence in the scheme will increase among the self-employed.
You can join the pilot by using your Government Gateway user ID and password and logging in to the online Self Assessment service.
7. Business rates now pegged to CPI
Philip Hammond has brought forward this change by two years. Business rates are now linked to the lower Consumer Prices Index (CPI) measure of inflation, rather than the Retail Prices Index (RPI).
In September last year, RPI was 3.9 per cent, but CPI was just 3 per cent.
Do you have employees?
If you do, there are some more changes you should know about. These are:
- The National Living Wage rise: for employees 25 and over (and not in the first year of an apprenticeship), this goes up to £7.83 an hour from £7.50
- Employee pensions: you now need to make a 2 per cent contribution into your employees’ pension funds – up from 1 per cent, and increasing to 3 per cent in April 2019
If you’re in any doubt about the tax changes for 2018, you should seek help from a qualified accountant.
What do you think about the self-employed tax changes for 2018? Let us know in the comments below.