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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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.
These are the income tax rates and thresholds the self-employed should be aware of in 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.
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.
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.
Employers should also note increases in the National Living Wage (NLW) and National Minimum Wage (NMW) rates. These are:
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.
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.
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:
There are different penalty thresholds depending on your submission frequency:
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.
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.
Please use this article as a guide and get professional tax advice if you're not sure about anything.
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