If you’re running your own business, every penny counts – and tax rules can have a huge impact on how much you earn. As the new tax year kicks off, find out how taxes will impact your bottom line.
The new tax year starts on 6 April 2018, meaning a range of previously-announced rule changes will kick in.
We explain the most important tax changes for the 2018-19 tax year you need to know about if you’re self-employed.
1. Tax-free dividend allowance slashed
Many self-employed people set up companies to take payments and pay out expenses, then pay themselves a dividend from the profits they make. This allow them to minimise their income, and therefore their income tax bill.
But as of 6 April, this strategy will be less beneficial, as the amount you’re allowed to earn from dividends before paying tax – known as the dividend allowance – is set to fall.
Previously, you were able to earn £5,000 a year from dividend income before paying tax on it. But from 6 April, this allowance will drop to £2,000.
Use our 2018-19 dividend tax calculator to find out what you’ll pay.
2. Higher thresholds for Class 2 and Class 4 contributions
If you’re self-employed, you need to pay Class 2 contributions on income above a certain amount. In 2018-2019, this threshold is £6,205 a year – up from £6,025 in the 2017-2018 tax year.
If you earn less than this, you won’t need to pay National Insurance at all, though you can opt to make voluntary Class 2 contributions.
The threshold for Class 4 has also risen, from £8,164 last year to £8,424 in 2018-2019.
- Find out more: National Insurance for the self-employed
3. Increased rate for Class 2 contributions
The rate for Class 2 contributions is also going up. In 2017-2018, you had to pay £2.85 per week for your Class 2 contributions – in the coming year, that will increase to £2.95 per week.
These changes to NI contributions mean lower-earners will end up paying slightly less National Insurance, while higher-earners will pay a little more.
As an example, if you earn £20,000, you’ll pay £1,195.24 into National Insurance in 2018-2019 – £18 less than what you paid last year. But if you earn £70,000, you’ll pay £4,039.74 in this tax year – an increase of £76.
You can use our calculator to work out how much National Insurance you’ll pay in 2018-2019.
4. Capital gains tax allowance increased
Profit you’re able to earn tax-free from selling assets – known as the ‘capital gains tax allowance’ – will increase to £11,700 in the 2018-19 tax year. This is up from £11,300 in the tax year prior.
This means if you’re planning to sell a valuable asset that qualifies for capital gains tax, you’ll get a smaller tax bill.
If you’re selling a business as a sole trader or partnership, don’t forget you may be able to benefit from ‘entrepreneur’s relief’. This reduces the capital gains tax rate to 10% on the first £10m of gains you make over your lifetime.
5. Personal allowance increases
Like other earners, the self-employed will benefit from an increased personal allowance, which determines how much you can earn before you pay income tax.
For 2018/2019, the personal allowance is £11,850, up from £11,500 in the previous tax year.
Remember that as a self-employed person, you pay tax on your profits – meaning your earnings after expenses are deducted.
If you’re in Scotland, keep in mind that a new income tax system applies to you from the 2018-19 tax year – you can find out more in our guide to income tax in Scotland.
- Find out more: self-employed income tax
6. Higher rate threshold increases
For England, Wales and Northern Ireland, you’ll need to pay a higher rate of income tax on profits above £46,350 – this is up from £45,000 in the 2017-18 tax year.
To work out how these changes will affect your tax bill, you can use our income tax calculator.
Income tax in Scotland works differently. There are five rates of income tax to pay:
- Income between £11,850 and £13,850 is subject to the starter rate of 19%
- Income between £13,850 and £24,000 is subject to the basic-rate of 20%
- Income between £24,000 and £43,430 is subject to the intermediate rate of 21%
- Income between £43,430 and £150,000 is subject to the higher rate of 41%
- Income above £150,000 is subject to the top rate of 46%.
7. Making Tax Digital pilot
In coming years, HMRC plans to introduce a monthly or quarterly income reporting system for sole traders and small businesses, a project called Making Tax Digital.
Rather than submitting a single tax return, businesses will report their earnings on a regular basis and receive an estimate of their tax liability.
While the roll-out has been delayed until 2020, sole traders can sign up for a pilot to use the software at the HMRC website.
8. Business rates to switch to CPI
The way business rates increase is set to change as of April. Currently, business rates are increased in line with September’s Retail Prices Index (RPI), but moving forwards, rates will be tied to the Consumer Prices Index (CPI).
This may seem like a technical change, but you’re likely to benefit from a lower rates, as CPI tends to be a lower than RPI. In September last year, CPI was 3%, while RPI was 3.9%.
- Find out more: Should this way of calculating inflation be scrapped?
9. IR35 crackdown may be imminent
In April 2017, the government rolled out tax reforms in the public sector to ensure compliance with IR35 – legislation to combat companies mis-classifying employees as contractors to avoid tax. There is speculation that this crackdown will be extended to the private sector in the coming year.
The IR35 rules primarily apply to people employed as contractors through an intermediary or personal service company.
If you’re a freelancer or contractor, you should check whether IR35 could apply to you because if it does, you may face a hefty tax bill. In the private sector, the employee is responsible for checking their status and will be liable for any tax owing.
10. VAT threshold decrease on hold
Before the Autumn 2017 Budget, there was some speculation that the government might lower the threshold at which small businesses had to register for VAT.
But ultimately, the government announced the threshold would remain at £85,000 for two years from 1 April 2018. Around 6,000 small businesses are expected to surpass the threshold for VAT in the 2018-19 tax year.
- Find out more: self-employed VAT explained
If you employ staff…
11. Rise in minimum pension contribution
From April 2018, employers will need to make a 2% mandatory contribution into their employee’s pension fund – up from 1% in the previous tax year.
Keep in mind that this will increase again from April 2019 to 3%.
- Find out more: pensions auto-enrolment – how it works
12. Increase in National Living Wage for staff
As an employer, you should be aware that the National Living Wage will increase from £7.50 to £7.83 from April 2018 – a rise of 4.4%.
This means you’ll need to raise the wages for any staff aged over 25 who are paid at the minimum wage.
Editors’ note: this story has been updated to correct an error in the National Insurance section