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29 Mar 2019

5 major changes to self-employed tax coming in the 2019-20 tax year

From Making Tax Digital to National Insurance hikes, here's what you need to know

On 6 April, 32 million people will pay less tax thanks to sweeping changes to the tax threshold for the 2019-20 tax year. But if you work for yourself, is it only good news for your tax affairs in the next tax year?

The self-employed will enjoy income tax cut like the UK's employees, but the introduction of a new scheme to digitise tax returns and changes to capital gains tax relief for business owners could eat into those gains.

Find out what's coming down the line in the 2019-20 tax year, and how to make sense of the new tax year's changes.

Income tax bands increase in 2019-20

The amount of net profit you can earn before you pay any income tax at all is rising to £12,500 on 6 April - a 5.5% increase on last year's 'personal tax-free allowance' of £11,850.

If you're a high earner, however, you're personal allowance could be reduced. If your net profits exceed £100,000, your personal allowance will be reduced by £1 for every £2 you earn over this amount. If you earn £124,000, you'll get no personal allowance at all, and will be taxed on all of your net profit.

This won't affect the majority of self-employed people in the UK, however - and there is an additional tax boost being introduced on 6 April.

The threshold at which you pay higher-rate tax - 40% - is increasing from £46,350 to £50,000. The government estimates there will be one million fewer higher-rate taxpayers as a result.

Find out more:self-employed income taxes explained

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Self-employed National Insurance hikes

The reduction in income tax for higher-rate taxpayers will be offset, however, by an increase in National Insurance rates for the self-employed.

The self-employed pay potentially two rates of National Insurance - Class 2 contributions, which is a flat weekly amount, and Class 4 contributions, which is a percentage of your earnings.

From 6 April, you won't pay any National Insurance if you earn less than £6,365. If you earn between £6,365 and £8,632, you'll pay Class 2 contributions of £3 a week, or £156 a year.

Earnings between £8,632 and £50,000 face a 9% Class 4 contribution, and earnings above £50,000 are charged 2% National Insurance.

Self-employed 2018/19Self-employed 2019/20
How much you earnClass 2 and Class 4 ratesHow much you earnClass 2 and Class 4 rates
Less than £6,2050%Less than £6,3650%
£6,205-£8,424£2.95 per week (Class 2 only)£6,365-£8,632£3 per week (Class 2 only)
£8,424-£46,3509% + £2.95 per week£8,632-£50,0009% + £3 per week
More than £46,3502% + £2.95 per weekMore than £50,0002% + £3 per week

You can see how the amount you can earn before paying Class 2 and Class 4 has crept up in the graph below.

All of the thresholds for paying National Insurance have increased, so why will you some of your income tax savings be lost to increased National Insurance?

The highest rate of 9% is charged on earnings up to the higher rate threshold of £50,000, which means more of your income is being effectively taxed at a higher rate.

Say your net profit for the year is £60,000 in the 2019-20 tax year. You'll pay £11,500 in income tax, £860 less than 2018-19.

But your National Insurance bill will be £4,078 - £239 higher than the previous tax year when it would have been £3,839.

Use our National Insurance calculator to find out how much you'll pay.

'Making Tax Digital' - does it affect you?

On 1 April, a little earlier than the start of the new tax year, an estimated 1.2m businesses will have to report their some of the tax returns in a new way, via a government programme called 'Making Tax Digital'.

The initiative is described as being 'part of the government's plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs' by making tax records and tax returns digital, so they're stored and filed online using software that is compatible with HMRC's systems.'

From 1 April,businesses with a turnover of more than £85,000 will have to submit their VAT returns through the new system.This has required investment for businesses in new record-keeping software, and the rollout of the scheme has been criticisedfor to understand the impact it will have on small businesses.

The government has initially planned for income tax reporting to be carried out under the scheme by April 2020. This has been put on hold so HMRC can focus on the UK's Brexit preparations.

Stricter rules for entrepreneur's relief

From April 2019, the minimum period needed to qualify forentrepreneurs' reliefwill be extended from one year to two years.

This is effectively a capital gains tax cut for people who want to sell all or part of their business or shares in a company.

Business owners who sell up before at least two years have gone by will lose their entrepreneurs' tax relief (which is 10% on the first £10m of gains) and will be liable to pay the normal rates of capital gains tax instead.

Capital gains tax-free allowance rises

If you make a living buying and selling goods for a profit, you'll benefit from an increased capital gains tax allowance.

Capital gains tax is paid on profits you make selling shares, property and other assets.

For shares and assets, basic-rate taxpayers pay 10% capital gains tax, and higher and additional-rate taxpayers pay 20%. For property, the basic and higher/additional rates are 18% and 28%, respectively.

However, you can earn a certain amount each year before you pay any CGT. In 2019-20, this is £12,000, up from £11,700 the previous year.