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2 Apr 2020

Four changes to self-employed tax coming in the 2020-21 tax year

From the National Insurance threshold rise to tax bill deferments, here's what you need to know

From 6 April, millions of workers including the self-employed will pay less tax thanks to a rise in the National Insurance threshold for the 2020-21 tax year. But amid the fallout of the coronavirus pandemic, will you still be better off?

Usually, tax deadlines are set for the same date each year. But while the coronavirus pandemic continues to impact businesses and the wider economy, a series of tax deferments have been announced to help people through these difficult times.

Here, Which? rounds up some of the key changes to self-employed tax rules announced in this year's Budget, plus the extra measures being used to help the self-employed get through the coronavirus crisis.

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1. Tax bill deferments

If you're self-employed, you'll need to fill in a self-assessment tax return each year and pay your tax bill either in one go by 31 January or using payment on account.

But due to the fallout of coronavirus, if you have tax payments due in July 2020 under the self-assessment system, you can defer them until January 2021.

This will particularly affect those who pay tax by payment on account, where you pay in two instalments - one by the end of January and a second instalment by 31 July. As you pay an estimated amount of tax before submitting your tax return, you may have to make an additional balancing payment by the following 31 January deadline if you made more profit than expected.

In addition, VAT payments due before 30 June 2020 will not now need to be made until 31 March 2021. This applies to UK VAT-registered businesses that have a payment due between 20 March 2020 and 30 June 2020.

Anyone who missed the January self-assessment deadline was also given a four-week extension to file their tax return, starting 26 March, in order to qualify for self-employed income support relief of up to £2,500. This is a taxable grant that the government plans to pay to self-employed workers from June.

  • You can start your 2019-20 tax return with the Which? tax calculatorand submit your return directly to HMRC.

IR35 delayed

The government has also postponed controversial tax reforms to off-payroll working rules (known as IR35) for the private sector until April 2021, to help ease the strain that the coronavirus pandemic is putting on businesses and individuals.

This was announced in the House of Commons in March, along with an emergency £330bn financial package to bolster the UK economy that includes a business rates holiday as well as loans for struggling firms.

When the changes come into force it will mean every medium and large private sector business in the UK will have to set the tax status of its contract workers, meaning thousands could have to pay more tax.

2. Self-employed National Insurance threshold rise

As part of the 2020 Budget, Chancellor Rishi Sunak announced that the National Insurance Contribution (NIC) thresholds for the 2020-21 tax year will rise.

Both employed workers and self-employed workers who pay Class 4 contributions, will be able to earn up to £9,500 in 2020-21 (up from £8,632 in 2019-20) before they have to pay.

The government says that this is the first step in its plan to raise the NIC threshold to £12,500, to align it with the income tax personal allowance threshold for both employees and self-employed workers.

Below, we've set out what the thresholds are for 2019-20, and what they will be in the new tax year.

It's estimated that 31 million Brits will get an average pay rise of £104, or £78 if you are self-employed.

For example, a self-employed worker with profits of £20,000 would have had to pay £1,176.52 in 2019-20 through a mix of Class 2 and Class 4 contributions. But in 2020-21 they will pay £1,103.60 - a £72.92 boost.

Here's how Class 2 and Class 4 thresholds have changed over time.

If you're self-employed and above state pension age, you don't need to pay Class 2 contributions. You do need to pay Class 4 contributions, but only for the tax year you reach state pension age.

It's also worth mentioning that gaps in your NICs could affect your state pension in retirement and could also affect your entitlement to some benefits.

You can fill gaps in your record by purchasing Class 3 contributions. In 2020-21, Class 3 NICs will cost £15.30 per week.

Use our NI calculator to find out how much you'll need to pay in 2020-21.

3. Capital Gains Tax allowance and bill payment changes

From 6 April, the Capital Gains Tax (CGT) allowance will increase from £12,000 to £12,300 for individuals and representatives, and from £6,000 to £6,150 for trustees of settlements.

CGT is a tax on the increased value of your possessions - such as a second home, antiques or shares - during the time you have owned them.

The CGT allowance is the amount you can make from the increased value of your possessions tax-free.

And, from 6 April, anyone who makes a taxable capital gain from UK residential property will have to pay the tax they owe within 30 days of the completion of the sale or disposal.

Currently, you'd add this to your self-assessment tax bill due by 31 January following the end of the tax year in which the sale or disposal was made. So, if you'd made a gain from a property sold on 3 April 2020 - in the 2019-20 tax year, you wouldn't have to declare or pay the tax until submitting your return by 31 January 2021.

4. Entrepreneurs' Relief slashed by 90%

If you're selling a business, there are extra reliefs available which might mean you can pay less CGT when you sell or give away your company. This is called Entrepreneurs' Relief.

In 2020-21, this tax relief is due to be slashed by 90%.

Under the revamp, you'll be charged 10% on the first £1m of gains when selling a qualifying business, rather than the first £10m. This means that anything above £1m will be taxed at normal CGT rates of 10% or 20% for higher-rate taxpayers.

The allowance applies at an individual level, so £1m is the maximum you can claim per person, rather than for each business you sell.

You'll need to calculate and pay your CGT bill in the same way as when selling any other asset.

How Entrepreneurs' Relief has changed over the years

Coronavirus help and guidance for the self-employed

Experts from across Which? have put together the advice you need to stay safe and make sure you're not left out of pocket.

This includes information on your rights to financial support if you're self-employed and how you can apply for a mortgage holiday.

You can keep up to date on our latest coverage on our coronavirus advice hub.

Meanwhile, If you're in temporary financial distress because of COVID-19, more help is available from HMRC's Time to Pay scheme.