Q1: Tax update 2021 For small businesses and self-employed6 Mar 2021
The Chancellor announced a number of changes in the 2021 Spring Budget that will affect you if you are self-employed, work as a contractor through a limited company or run a small business. Some of the changes take effect immediately; others will impact your business in future tax years.
To help you understand the changes, we’ve put together a simple guide to the new measures. Some changes, like IR35 for the self-employed or reverse charging for VAT in the construction industry, are more complicated and you may need to take professional advice.
CHANGES IN TAX FOR ALL TAXPAYERS
A number of changes affect all taxpayers, regardless of employment status.
Personal tax allowances and tax rates
The personal allowance – the amount you can earn before paying tax – increases from £12,500 to £12,570 for tax year 2021 – 22. However, that allowance will be frozen from 2022 to 2026.
Basic rate tax band – You pay tax at 20 percent on income between £12,571 and £50,270 for tax year 2021 – 22. (£12,501 and £50,000 in 2020-21)
Higher rate tax band - You pay tax at 40 percent on income between £50,271 and £150,000 for tax year 2021 – 22. (£50,001 and £150,000 in 2020-21)
Additional tax band - You pay tax at 45 percent on income above £150,000 for tax year 2021 – 22. (no change since 2020-21)
Capital Gains Tax
There are no changes in Capital Gains Tax (CGT) this year. The allowance will be fixed until 2026 at £12,300 before CGT is due.
The Stamp duty holiday on house purchases in England and Northern Ireland was extended to 30th June 2021, with no tax liability on sales of less than £500,000. For properties under £250,000 there will be no tax liability until 30th September 2021.
If you miss a submission deadline – monthly, quarterly or annually – you will get one point.
When you reach a threshold, you will receive a £200 penalty.
The thresholds are: annual two points, quarterly four points, monthly five points.
The new system will take effect in April 2022 for VAT and April 2023 for self-assessment.
Read More: Self-Employed Allowable Expenses
CHANGES IN TAX FOR SELF-EMPLOYMENT
National Insurance (NI) thresholds
Class 2 NI contributions
The threshold increases from £6,475 to £6,515.
Above that figure you pay contributions of £3.05 per week if your contributions are between £6,515 and £9,568.
If profits are above £9,568, you pay Class 4 contributions
Class 4 NI contributions
The lower profits limit rises from £9,500 to £9,568. Above that figure you pay contributions at 9 percent of profits.
The upper profits limit increases from £50,000 to £50,270. Above that figure you pay contributions at 2 percent.
New IR35 rules
If you work for a large client through a limited company, you will no longer be responsible for working out your tax status. From April 2021, your clients will be responsible for determining your status and reporting it to HMRC.
This could mean that you are no longer classed as self-employed if that is your client’s view and you may have to pay tax under different rules.
Your clients must inform you of their decision. If they decide you are not self-employed, your clients must collect tax and National Insurance contributions from the money they pay you. Read our contractor’s guide on when IR35 applies here.
The new tax penalty system described earlier will apply to you from April 2023 if you submit self-assessment returns late. If you are subject to VAT, the new rule applies from April 2022.
CHANGES IN TAX FOR CONTRACTORS
The changes in self-employment tax described above also apply to contractors. There are additional changes to VAT for contractors working in the construction industry.
VAT reverse charge on construction and building services
Under the new system, if you are a VAT-registered subcontractor supplying qualifying services to other construction industry contractors, you must show, but no longer charge, the correct rate of VAT on your invoices to contractors from 1st March 2021.
Instead, the contractor has to account for the VAT to HMRC.
The new system applies to activities covered by Construction Industry Scheme (CIS) payment rules. It covers both standard and reduced-rate VAT supplies to VAT-registered contractors making onward supplies of the services to ‘end users’, such as landlords, property developers, tenants or property owners. You can read our full guide on the VAT reverse charge here.
CHANGES IN TAX FOR SMALL BUSINESSES
National Insurance contributions
If you are a small business owner, you will have to pay Employee NI contributions on your own income and collect Employer NI contributions if you employ staff.
There are changes in thresholds and rates for both categories of contribution.
Class 1 Employer NI contributions - The secondary threshold increases £8788 to £8840. You will pay contributions of 13.8 percent on employees’ salaries above that level.
Class 1 Employee NI contributions - Employees pay contributions of 12 per cent on earnings between £9,568 and £50,270 in 2021-22. That’s an increase on the previous bands of £9,500 to £50,000. Employees pay two per cent on any earnings above £50,270.
Corporation Tax will increase, but not until April 2023.
Corporation Tax will rise to 25 percent of profits, but only for businesses with profits of more than £250,000.
Businesses with profits less than £50,000 will continue to pay the current rate of 19 percent.
Tapered rates will be applied to profits between £50,000 and £250,000.
There are no changes to the Dividend Tax Allowance, which remains at £2000.
The Dividend Tax thresholds are in line with Personal Income Tax bands, which have increased for 2021-22.
Basic rate taxpayers pay 7.5 percent on dividends.
Higher rate taxpayers pay 32.5 percent on dividends.
Additional rate taxpayers pay 38.1 percent on dividends.
Support from Accounts and Legal
This is a brief outline of the tax changes that may affect your business or your personal tax position. If you would like to discuss any aspect of these changes, or need any tax services, our team of experienced small business accountants will be glad to help.
To find out more, please contact us on 0207 043 4000 or email@example.com.