There are always tax and other financial changes the self-employed have to get to grips with when the new tax year starts on 6 April.
These can have a big effect on your earnings so it’s important to understand them sooner rather than later.
From changes to your personal allowance to a big increase in the national living wage, here’s a list of tax and other changes the self-employed need to know about.
- Self-assessment tax returns: a comprehensive guide
- The small business guide to Corporation Tax rates
- A guide to the dividend tax rate and paying tax on dividends
- What is business insurance?
1. Personal allowance and higher rate increases for the UK
The government is fulfilling its commitment to raise the personal allowance to £12,500 a year early.
for 2019-20, the personal allowance increases from £11,850 to £12,500. Your personal allowance is how much you can earn before you start paying income tax
for 2019-20 the higher rate threshold increases from £46,350 to £50,000. 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 £12,500 and £14,549 (up from £11,850 to £13,850 the year before).
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. Have employees? The national living wage increases nearly 5%
While not a tax change, an increase in the national living wage will affect business owners with employees.
From 1 April 2019 it increases by 4.9 per cent, from £7.83 to £8.21. The Chancellor said in the Autumn Budget that this hands “a full-time worker a £690 annual pay increase.”
There are other changes to minimum wages that business owners should know about:
- the rate for 21 to 24-year-olds increases 4.3 per cent from £7.38 to £7.70 per hour
- the rate for 18 to 20-year-olds increases 4.2 per cent from £5.90 to £6.15 per hour
- the rate for 16 to 17-year-olds increases 3.6 per cent from £4.20 to £4.35 per hour
- the rate for apprentices increases 5.4 per cent from £3.70 to £3.90 per hour
- the accommodation offset increases 7.9 per cent from £7.00 to £7.55
The Low Pay Commission recommended the changes and said the new national living wage ensures “a pay rise for the lowest-paid workers that exceeds both inflation and average earnings.”
The government will consult on what changes should take effect from April 2020.
And keep in mind that the employee pension contributions you need to make to your employees’ pension funds goes from 2 per cent to 3 per cent from April.
3. Are there any more changes to the dividend allowance?
The good news is that the government has made no further changes to the dividend allowance for 2019-20.
But a cut to the dividend allowance was a headline change for the self-employed in 2018-19. So when it comes to filing your online Self Assessment tax return for 2018-19 in January 2020, you’ll receive the new, lower £2,000 dividend allowance.
This means you’ll get to earn just £2,000 as dividends before paying tax, down from £5,000 previously.
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.
4. Self-employed National Insurance contributions
Here’s how the National Insurance thresholds and bands change for 2019-20, for both sole traders and limited company directors.
Small profits threshold, Class 2 NICs and Class 4 NICs (sole traders)
small profits threshold – this increases from £6,205 to £6,365 for 2019-20. You start paying Class 2 NICs if you earn more than this threshold
Class 2 NICs – the flat rate increases from £2.95 per week to £3.00 per week for 2019-20
Class 4 NICs thresholds and limits – the earnings threshold before you start paying these increases from £8,424 to £8,632 for 2019-20. You pay 9 per cent of profits between £8,632 and £50,000 per year (up from £8,424 and £46,350), plus 2 per cent of what you earn above that
Employer National Insurance contributions (limited company directors)
Limited company directors are classed as employees and have to pay employer National Insurance contributions.
- secondary threshold – this increases from £8,424 to £8,632 in 2019-20 (you’ll pay employer NICs of 13.8 per cent on annual salary payments above this threshold)
5. An increase in the Capital Gains Tax allowance
- in 2019-20, you can make £12,000 tax-free when you sell assets that qualify for Capital Gains Tax (up from £11,700 in 2018-19)
Basic 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.
6. Self-employed ISA allowance
For the third year in a row, your ISA allowance remains frozen at £20,000 for 2019-20. Your ISA allowance 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 your Personal Savings Allowance, which lets basic-rate taxpayers earn up to £1,000 in savings income-tax free – even outside of tax-efficient products like ISAs.
In addition to pensions for the self-employed, ISAs can be a useful and more flexible way to save.
7. Making Tax Digital: are you compliant?
After consultations, confusion and calls to delay, Making Tax Digital for VAT goes live from 1 April 2019.
VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000 need to make sure they’re complying with the new rules.
For VAT periods from 1 April businesses need to keep digital tax records and submit their VAT return using Making Tax Digital-compatible software.
HMRC says that during Making Tax Digital’s first year, it will “take a light touch approach to digital record keeping and filing penalties where businesses are doing their best to comply with the law.”
But they’re clear that this doesn’t mean a blanket “no penalties promise”, so if you’re not sure of the rules it’s important you get up to speed today.
We have a guide to Making Tax Digital for small businesses and the self-employed – take a look to understand what you need to do to comply, as well as to get to grips with the software you should be using.
Please use this article as a guide and if you’re not sure about the tax changes and tax allowances that come into effect from April 2019, speak to a qualified professional.
What do you think about the self-employed tax changes for 2019? Let us know in the comments below.