Being self-employed, we understand you have a lot to manage including getting to grips with big tax changes which can make all the difference to your business’ cash flow and therefore failure and success.
The 7 tax changes you need to know if your self-employed include an increase in personal allowance, National Insurance Contributions (NICs) changes and digital taxation.
Read on to see how you can keep yourself on the right side of the tax law and position yourself for tax savings if your self-employed.
1. Personal allowance increase
In 2019, the personal allowance, or the amount you earn before you start paying any income tax, increased from £11,850 in 2017-18 tax year to £12,500 in the current 2019-20 tax year. This translates to an increase of 5.5% increase in tax savings, which means being on average £130 better off than we were in 2018.
And if your a higher rate tax payer, you will also benefit from tax savings as the threshold has increased to £50,000. This means you can earn £50,000 before you pay a higher rate of tax on your profits. If your based in Scotland, you will be experiencing income tax differently, with two additional tax bands being introduced for the basic rate tax payer, but as a higher rate tax payer the increase in the higher rate band also applies. Good news all round!
Or is it?
2. You may have to pay more self-employed National Insurance Contributions (NICs)
As a self-employed individual or partnership, you pay a small flat weekly amount of Class 2 contributions as well as Class 4 contributions, which is based on the percentage of total earnings. There is a threshold, however, for both Class 2 and Class 4 NIC contributions where you do not need to pay NIC at all, which in 2019 is £6,365.
If you earn between £6,365 and £8,632, Class 2 contributions increased from £2.95 to £3 a week in 2019, albeit a very small increase to your tax bill.
However, if you earn between £8,632 and £50,000 in the 2019-20 tax year, you will need to pay 9% Class 4 contributions, plus the Class 2 contributions noted above. Anything you earn about £50,000 you will also need to pay an additional 2% on the additional income in contributions.
So depending on the level of income you pay yourself as a self-employed individual, you could potentially lose the benefits of the increase in personal allowance.
But don’t worry, there are other tax savings still in place for you to take advantage off if your self-employed…..
3. There is no change in your self-employed ISA allowance
2019 will be the third year in a row that the self-employed ISA allowance is frozen at £20,000.
Your self-employed ISA allowance is the total amount you can save in a tax-free way – whether it is cash, stock and shares, or a mix of them both. While there is no additional income in your pocket, the self-employed ISA still offers one of the most tax efficient and flexible ways to save your hard earned cash.
4. The increase in the national living wage
If your self-employed and your business has employees, you will likely already be aware of the increased in the National Living Wage. The increase in 2019-20 tax year rose to 4.9%, so an increase from £7.83 to £8.21, equating to a pay increase for the average full-time worker of around £690 a year.
There is a sliding scale of increases to the hourly rate of the national living wage, as shown below:
25 and over
21 to 24
18 to 20
5. The increase in the Capital Gains Tax allowance
If you are self employed and your business buys in and sells goods, the good news is that you will benefit from an increase in the capital gains tax allowance in the current 2019-20 tax year, increasing from £11,700 in 2019 to £12,000.
Capital gains is charged by the tax man on any profits you make selling property, shares or other assets.
6. Making use of your dividend allowance
Paying yourself dividends is the most tax efficient ways to pay yourself a salary if your self-employed and the good news is that the dividend allowance for 2019-20 remains at £2,000. Dividends can be paid on top of any salary payments so a very tax efficient way to top up any earnings you take from your business as salary paying a lot less tax. The dividend allowance has been scrutinised every year by the tax man, and to put into context, it was at £5,000 in 2017-18 tax year.
7. Making tax digital
I’m sure a self-employed person, you will have come across the government initiative for Making Tax Digital (MTD), even if it is not affecting you or your business yet. MTD was rolled out last year forVAT registered businesses with turnover of more than £85,000 where VAT returns are now expected to be submitted using the new digital system in place. MTD is an ambitious project, hence the government is rolling it out in stages but we do expect to see further changes in 2019, with tax returns being next on the Government agenda. We strongly recommend you link in with a Making Tax Digital Pro Advisor practice, like Southside accounting, so you are well prepared for the changes coming your way.
In summary: tax in 2019 is no less taxing
The tax regulations and rules change regularly and being self-employed, you need to make sure you are keeping up to date and following the tax rules correctly. What you need is a no-hassle accountant who has got your back. Why not give us a call to find out how we can help make your finances a whole lot easier.
We strongly recommend you speak with a tax and accounting specialist like Southside Accountants, your local accountants in Wimbledon and London. Please contact us to see how we as your accountants can help you run your business effectively.
Southside Accountants provide sole trader and limited company services, including tax return services, to small businesses in the UK and are a Xero Certified Advisor.
Written by Shaima Todd.