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7 self-employed tax changes for 2021-22

5-minute read

7 self-employed tax changes for 2021-22
Sam Bromley

Sam Bromley

19 March 2021

The new tax year starts on 6 April. Here are seven self-employed tax changes you need to know about for 2021-22, including new self-employed tax rates and thresholds.

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1. The personal allowance increases to £12,570 – but will be frozen until 2026

The personal allowance tax threshold has remained at £12,500 for two years, but the government is increasing it to £12,570 for 2021-22.

For now, this means that the self-employed should pay slightly less tax. But with the government freezing the threshold from 2022 until 2026, taxpayers could be worse off in the longer-term.

That’s because the threshold won’t be increasing in line with inflation – and if your earnings increase over time and the threshold stays static, you’ll notice that you’re paying more tax.

Plus, with concerns that inflation (a measure of the price of goods over time) is set to rise following the coronavirus pandemic, and the personal allowance staying static, taxpayers could start to feel the freeze from 2022 onwards.

Tax rates and thresholds the self-employed should know

These are the income tax rates and thresholds the self-employed should be aware of in 2021-22:

  • basic rate – 20 per cent on income between £12,571 and £50,270 – you pay tax on £37,700 (the threshold was between £12,501 and £50,000 in 2020-21)
  • higher rate – 40 per cent on income between £50,271 and £150,000 (between £50,001 and £150,000 in 2020-21)
  • additional rate – 45 per cent on income above £150,000 (the same as 2020-21)

There are different rates for Scotland.

2. Self-employed National Insurance thresholds and bands 2021-22

The self-employed usually pay both Class 2 and Class 4 National Insurance through their annual Self Assessment tax return.

Small business owners with staff also need to pay employee National Insurance contributions via payroll.

Here's how some of the National Insurance thresholds are changing.

Small profits threshold, Class 2 NICs and Class 4 NICs

  • the Class 4 National Insurance lower profits limit is increasing from £9,500 to £9,568 (this is the threshold at which self-employed people start paying Class 4 National Insurance, at nine per cent)
  • the upper profits limit is increasing from £50,000 to £50,270. The self-employed pay a lower rate of two per cent above this limit
  • the Class 2 National Insurance threshold increases from £6,475 to £6,515 in 2021-22 – Class 2 National Insurance contributions are £3.05 a week in 2021-22 (paid if your profits are between £6,515 and £9,568)

The Institute of Chartered Accountants in England and Wales (ICAEW) reports that because the upper profits limit is aligned with income tax thresholds, it’ll be frozen at £50,270 until 2026 too.

Employer and employee National Insurance contributions (Class 1)

Limited company directors are classed as employees and have to pay employer National Insurance contributions through the company.

And if you run a business with employees, you need to pay National Insurance contributions via payroll.

  • secondary threshold for employer NICs – this increases from £8,788 to £8,840 in 2021-22 (you’ll pay employer NICs of 13.8 per cent on annual salary payments above this threshold)
  • employee NICs – you pay 12 per cent of earnings between £184 and £967 per week (£9,568 and £50,270 annually) in 2021-22 (up from £183 and £962 per week and £9,500 and £50,000 annually). You pay two per cent on any earnings above £967 per week

Employers should also note increases in the National Living Wage (NLW) and National Minimum Wage (NMW) rates. These are:

  • £8.91 for employees 23 or over (NLW rate – up 2.2 per cent from £8.72)
  • £8.36 for employees aged 21 to 22 (up 2 per cent from £8.20)
  • £6.56 for employees aged 18 to 20 (up 1.7 per cent from £6.45)
  • £4.62 for employees aged 16 to 17 (up 1.5 per cent from £4.55)
  • £4.30 apprentice rate (up 3.6 per cent from £4.15)
  • £8.36 per week accommodation offset (up 2 per cent from £8.20)

3. New self-employed tax rules start in April

IR35 changes in the private sector will finally be introduced in April 2021.

The off-payroll working rules – known as IR35 – were originally due to change in April 2020, but the government delayed reform by a year because of coronavirus.

The changes mean that self-employed contractors and freelancers who work for large clients via an intermediary (often their own limited company) will no longer be responsible for working out their employment status for tax. Instead, that responsibility falls to the client.

But because IR35 is so complicated (and because clients will be liable for penalties if they get IR35 status wrong), many contractors are concerned that this extra administrative burden will make the sector less flexible.

Plus, they’re worried that clients will take a risk-averse approach and either not work with contractors’ limited companies, or ‘blanket’ assess them as being inside IR35, affecting the contractor’s bottom line.

With the change starting on 6 April, we’ll keep reporting on how the reform is going – and check out our IR35 support page for more helpful resources on this complex subject.

4. No capital gains tax changes – but the allowance will be frozen

In 2020, the government asked the Office of Tax Simplification to look at ways to simplify capital gains tax (CGT), a tax you pay when you sell an asset that’s increased in value.

The subsequent report recommended that CGT should be brought in line with income tax rates, which would effectively be a tax hike.

But these recommendations didn’t materialise in Rishi Sunak’s Budget announcement. Instead, the government has confirmed that the CGT allowance will be frozen at £12,300 until 2026.

This means that the first £12,300 of gains will continue to be tax-free – but as with the personal income tax allowance, this won’t rise with inflation, meaning that you end up paying more in tax over the long-term.

Read more about capital gains tax rates and allowances.

5. A points-based system for tax penalties

As part of the Finance Bill 2021, the government is introducing points-based penalties for VAT and Self Assessment, which it says will make the system “fairer and more consistent”.

HMRC says the system is designed to penalise those who consistently fail to meet their obligations, rather than hitting taxpayers with automatic penalties for making isolated mistakes.

While the change is in this year’s Finance Bill, it won’t come into effect until April 2022 for VAT, and April 2023 for Self Assessment.

Here’s how it’ll work:

  • taxpayers will get a point for every missed submission deadline (HMRC will let taxpayers know)
  • when taxpayers reach a certain points threshold, they’ll get a £200 penalty
  • taxpayers will get a penalty charge for every future missed obligation, but their points total won’t increase

There are different penalty thresholds depending on your submission frequency:

  • annual – two point threshold
  • quarterly (including Making Tax Digital for income tax Self Assessment) – four point threshold
  • monthly – five point threshold

Points will expire after two years. If you’ve reached your penalty threshold, points will only expire two years after you’ve fulfilled your obligations.

6. Stamp duty land tax holiday extended

This tax holiday could help self-employed people planning to buy property in 2021, but you’ll need to act quickly.

The stamp duty holiday for the first £500,000 on a property purchase was due to end on 31 March 2020. The government has extended this to 30 June 2021.

Then, it’ll taper down, meaning there’ll be no stamp duty on the first £250,000 of a property purchase until 30 September 2021.

7. Are there other tax changes the self-employed need to know for 2021-22?

  • the inheritance tax thresholds are frozen until 2026 (meaning the nil rate band will stay at £325,000)
  • the pension lifetime allowance is frozen at £1.073 million until 2026
  • other allowances remain the same, including the Individual Savings Account (ISA) allowance at £20,000, the dividend tax allowance at £2,000, and no changes to tax on savings interest

Please use this article as a guide and get professional tax advice if you're not sure about anything.

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