As we head into the summer, taxes are probably the last thing on your mind. After all, that tax return you submitted at the start of the year is now little more than a distant, painful memory and you don’t even want to think about the words “self-assessment” until at least after Christmas.
Yet, with the new 2018 – 2019 tax year comes a host of big changes that are likely to change the way you work, earn and pay tax as a self-employed tradesman. So, if you’re going to be in with the best chance of submitting a self-assessment that keeps both you and Mr Tax Man happy come January, there are a few things you might want to brush up on sooner rather than later.
Before you go ploughing your way through page-upon-page of boring government jargon, don’t worry – we’ve got you covered. Here’s your quick and simple guide to the 2018 tax changes and what they mean for you as a sole trader or small business owner.
You can now earn more before you start paying tax
Let’s start with some good news, shall we?
The personal allowance threshold has increased by £350.
It used to be that you could earn up to £11,500 before you started handing over your hard earned cash to HMRC. Now, you can earn up to £11,850 before paying income tax on your earnings. And, as if that wasn’t enough, the higher rates threshold has been increased too.
Previously, you had to pay the higher tax rate on earnings of £45,000 or above. That’s now risen to £46,350. Meanwhile, the additional rate threshold is still the same at £150,000.
If you’re reading this up in Scotland, then the rules are slightly different. You’ll pay tax on a sliding scale from 19% on earnings between £11,850 and £13,850 up to 46% on earnings over £150,000. Those helpful people at the Chartered Institute of Taxation have this handy guide to Scottish Income Tax Rates if you need it.
National Insurance contributions are changing
Remember back in February when we told you all about National Insurance (NI) contributions for self-employed tradesmen? Well, it turns out things have changed since then.
It used to be that you had to pay Class 2 NI contributions if you earned £6,025 or more, but this was increased at the start of the new tax year. Now, you can earn up to £ 6,205 before you start paying National Insurance.
Whilst that’s undoubtedly good news, there is a bit of a downer. The cost of Class 2 contributions has also changed, increasing from £2.85 per week to £2.95. And if you pay Class 4 contributions, you might want to take note of the changes to those. Much as with Class 2, the Class 4 threshold has increased from £8,164 to £8,424.
After that threshold, you’ll pay 9% on profits up to £46,350, plus 2% on anything over that.
They’re still trying to make quarterly tax returns a thing
Remember when Downing Street announced plans to scrap the annual self-assessment tax return in favour of quarterly returns? Remember how loads of businesses kicked off about it and forced them to change their minds?
Well, it turns out they didn’t change them completely.
You see, the government still plans to switch to regular tax returns by 2020 and are now inviting small business owners to take part in a trial program which, they hope, will prove their naysayers wrong by showing that it is a more effective and cost-efficient system.
The ‘Making Tax Digital’ pilot enables you to keep digital records and send regular tax updates, a process which aims to give you an idea of how much tax you might need to pay as you go along. Some see this as a better option than that dreadful moment when the amount you owe comes as an unwelcome surprise at the end of every tax year.
If you’re one of them, you can voluntarily opt-in to the Making Tax Digital trail online.
Business rates now linked to CPI
Previously, business rates have been linked to the Retail Price Index (RPI), which stands at 3.9%. Plans were in place to shift them to the lower Consumer Prices Index (CPI) of 3% in a few years time.
However, the Chancellor couldn’t wait that long and brought the change forward to this year. Exciting, right?
Okay, not really – but it is important for those of you who own a property that you use for your business as it affects how much tax you’ll pay on that property.
Sorry, but your tax-free dividends are being cut
There was plenty of uproar when Phillip Hammond and his chums introduced this next big change: slashing the dividend allowance from £5,000 to just £2,000.
That means that, if you’re a tradesman who runs your own company and you pay yourself a dividend, you’ll only be able to earn up to two grand before you start paying tax on it.
The tax band that £2,000 falls into will determine which rate of dividend tax you pay. HMRC can help you figure that out online.
Capital Gains Tax allowance is now higher
Last year, you could make up to £11,300 if you sold assets which qualified for Capital Gains Tax. This year however, you can make a few hundred quid more. The new Capital Gains Tax allowance is £11,700.
For anything above that, you’ll pay 10% Capital Gains Tax if you’re a lower-rate taxpayer, or 20% if you’re a higher or additional ratepayer.
What you need to know if you hire employees
If you have employees working for your trade business, there are few other changes you need to know – the National Living wage for employees aged 25 and over is now £7.50 per hour. This doesn’t apply those in their first year of an apprenticeship.
Also, you’ll now need to make a 2% contribution to your employees’ pension fund, and be ready to pay 3% from April 2019.