If you’re running your own business it is very important that you keep yourself up to date with any tax changes in a new tax year. 2018-19 is no different and HMRC have made a few tax changes which you should be made aware of.
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 2017/2018.
Remember that as a self-employed person, you pay tax on your profits – meaning your earnings after expenses are deducted.
Tax-free dividend allowance slashed
A headline 2018-19 tax change for the self-employed is the cut in the dividend allowance. This is part of the government’s attempt to bring the tax treatment of the employed, self-employed, and directors/shareholders in line with each other.
If you pay yourself a dividend through your company, the allowance is dropping from £5,000 to £2,000. This means you’ll get to earn £2,000 as dividends before paying tax.
The rate of dividend tax you pay depends on which tax band the first £2,000 falls into.
Increased thresholds for Class 2 and Class 4 national insurance 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.
Capital gains tax allowance increased
In 2018-19, you can make £11,700 tax-free when you sell assets that qualify for Capital Gains Tax, up from £11,300 last year.
Lower rate taxpayers pay 10 per cent of Capital Gains Tax on profits above the allowance. Higher and additional rate taxpayers pay 20 per cent.
Making Tax Digital pilot
In March 2018, HMRC rolled out an invitation for sole traders to join its Making Tax Digital pilot, ahead of its full introduction for all taxes in 2020.
The pilot gives the self-employed the chance to keep records digitally, by submitting regular Income Tax updates, rather than completing an annual Self Assessment tax return.
You can join the pilot by using your Government Gateway user ID and password and logging in to the online Self Assessment service.
And if you employ staff, you should also be aware that, there are some more changes you should know about. These are:
- The National Living Wage rise: for employees 25 and over (and not in the first year of an apprenticeship), this goes up to £7.83 an hour from £7.50
- Employee pensions: you now need to make a 2 per cent contribution into your employees’ pension funds – up from 1 per cent, and increasing to 3 per cent in April 2019
If you’re in any doubt about the tax changes for 2018, feel free to get in contact for a free consultation.