Right now, a big part of being in business is quickly adapting to change. It seems like we get new information and regulations every day. And then they are amended to incorporate the next thing. It’s exhausting.
To be on the ball, you need to keep abreast of the latest information and figure out how it applies to you.
Here we’ve summarised four key tax changes that affect self employed taxpayers in the 2020-21 tax year.
1. National Insurance Contributions
As of 6th April 2020, you need to earn £9,500 before you are liable to pay National Insurance Contributions (NICs). This applies to both employed and self employed taxpayers. This is a substantial increase from the £8,632 of the last tax year.
The government predicts that this will help 31 million taxpayers, with self employed people saving £78 and employed people saving £104 each.
It is part of their plan to eventually make the NICs and Personal Allowance thresholds the same for all taxpayers. That would mean you’d need to earn £12,500 before you pay any NICs or Personal Allowance.
If you discover that you have gaps in your NICs payments, you can buy Class 3 NICs at a cost of £15.30 per week (2020-21 price). This is advisable to avoid any damage to your state pension or ability to claim some other benefits.
Remember that you don’t pay any Class 2 NICs if you are over state pension age and self employed. You do pay Class 4 NICs in the year you have your state pension age birthday.
2.Capital Gains Tax Allowance
Some possessions increase in value the longer you own them, like art, property or shares. When you sell these items it’s usually for more than you bought them. This is the ‘gain’ in Capital Gains Tax (CGT). And you are liable to pay this tax on the sale of your high value items on anything over the Capital Gains Tax allowance.
HMRC have increased the CGT allowance for individuals by £300, taking it to £12,300. So if you make less than £12,300 on the increased value of your items, then you don’t owe any CGT at all. For trustees and settlements, the CGT allowance has gone up by £150 to £6,150.
Be aware
The length of time you have to pay CGT on UK property sales is now only 30 days from completion. This is a huge difference to the previous rule of adding it to your self assessment tax bill and waiting until the January deadline.
3.Entrepreneurs’ Relief Cut
Entrepreneurs’ Relief applies when you are selling a business. It means that you pay less CGT when you sell your company. This tax year it has been cut by an enormous 90%.
Now, you can only claim 10% Entrepreneurs’ Relief on the first £1m of your sale. Anything you make after that will be taxed at the usual CGT rates of 10% or 20%, depending on your tax bracket. This is per individual, not per business sale.
Last year this 10% was applicable to the first £10m. It’s a big adjustment that will undoubtedly factor into many decisions about whether or not to sell this year.
Surprisingly, in comparison to other HMRC changes, this particular tax relief threshold has made some big jumps in a short period of time.
2020 – 21: £1million
2011 – 20: £10million
June 2010 – 2011: £5million
April 2010 – June 2010: £2million
2008 – 2010: £1million
It’s gone full circle in just 10 years.
4.Deferred tax payment deadlines
This has caught the headlines more than any of the other changes. There are three different areas of tax which now have deferment options: self assessment tax bills, VAT and IR35.
Self assessment tax bills are either paid in full on the 31st January, or in two instalments on July 31st and then January 31st. This is called payment on account. The government has said that July 2020’s payments can be deferred until January 2021.
Obviously, any jump in profits will mean you’ll need to adjust the figure accordingly. This is designed to give businesses a little bit of short term relief while they recover from lockdown.
VAT
With the same aim of giving some breathing space, VAT payments due by 30th June 2020 can be deferred until 31st March 2021. You can use this if you are a UK VAT registered company that had a VAT payment due for the period between 20th March and 30th June 2020.
IR35
Changes to the IR35 regulations covering the classification of contract work were announced in March, pre COVID. Implementing these new rules is now deferred until April 2021. HMRC considered that businesses had enough immediate issues to deal with, without adding in entirely new regulations. They have made it very clear that this is a deferment, not a cancellation of the policy, despite its huge unpopularity.
