New tax year: what has changed?

A new tax year has begun and as usual, there are changes to rules and regulations that will affect freelancers, contractors and small business owners. Here’s what you need to know.

New VAT flat rate scheme rate for certain businesses

Background

The VAT flat rate scheme is an alternative way for small businesses to work out how much VAT to pay to HMRC each quarter. When you are using the flat rate scheme, you still charge VAT to your customers in the normal way, but you pay a percentage of your total sales to HMRC as VAT. This percentage depends on what your business's trade is.

What’s changed?

Since 1st April 2017 businesses with a low cost base (e.g. who don’t buy many goods) are now known as ‘limited cost traders’. A limited cost trader is defined as one that:

  • spends less than 2% of its sales on goods (not services) in an accounting period, or
  • spends less than £1,000 a year on certain goods.

How could it affect you?

If you’re a limited cost trader then you can still use the flat rate VAT scheme, but your percentage will be 16.5% (which is currently higher than any other rate). You may want to reconsider if the VAT flat rate scheme is the best scheme for you - use our VAT FRS calculator to determine if you would pay more on the flat rate scheme.

For more information check out our handy blog post about changes to the VAT flat rate scheme.

VAT thresholds going up

Background

VATable sales are sales that your business will have to charge VAT on if it is registered for VAT. There are different rates of VAT in operation in the UK.

What’s changed?

If you’re not yet registered for VAT, from 1st April 2017 you won’t have to do so until your VATable sales go past £85,000 a year (or within the next 30 days). This is an increase from £83,000 the previous year.

How could it affect you?

If you’re already registered but want to de-register for VAT, which you may decide to do based on the changes to the flat rate scheme, then you’ll be able to do that if your VATable sales are below £83,000 a year from 1st April 2017 (before that date the threshold was £81,000).

Responsibility for determining IR35 falls to public sector organisations

Background

IR35 is a piece of legislation that allows HMRC to collect additional payment where a contractor in the public sector is an employee in all but name. IR35 was introduced to stop people taking advantage of reduced tax bills by working through intermediary companies specifically to avoid paying taxes.

What’s changed?

As of 6th April 2017, public sector bodies, rather than individual contractors, are now responsible for determining whether IR35 applies. Whereas previously you could have decided that you didn’t fall under IR35, now, if you work in the public sector, it will be for the public sector body engaging you to decide if you fall within IR35.

How could it affect you?

If you supply services via your business to any public sector bodies, then you and your engager should take steps to find out if you fall under IR35. Criteria for IR35 is quite vague and complicated. You can use HMRC’s new tool to determine if your contract is within IR35.

If it turns out that you do fall under IR35 then you will have to pay significantly more tax. You can read more information on the IR35 changes on our blog.

Income Tax band changes

Background

Income Tax is tax that's payable on your earnings. It's charged at different rates depending on what kind of income it relates to.

What’s changed?

From 6th April there are changes to the Personal Allowance, the Basic Rate Limit and the Higher Rate Threshold for employees in England and Wales. The Scottish Income Tax rate will be applied separately, see below.

How could it affect you?

You’ll pay a new rate of Income Tax on your earnings. Here are the new Income Tax bands, alongside last tax year’s:

  2016 to 2017 2017 to 2018
Personal allowance £11,000 £11,500
Basic Rate Limit £32,000 £33,500
Higher Rate Threshold £43,000 £45,000

Changes to Scottish rate of Income Tax

Background

For the first time, from 6th April the Scottish Parliament sets all Income Tax rates and bands (except the personal allowance) for employees resident in Scotland.

What’s changed?

The higher tax rate of 40% will now apply to those in Scotland who earn over £43K, whereas in the rest of the UK the higher rate will start after income of £45K.

How could it affect you?

If you’re a sole trader living in Scotland then you will have to indicate this on your self assessment tax form.

If you're an employer, expect to receive Scottish tax codes for any of your employees who are living in Scotland, and use these when you're running your payroll. You can keep up to date with current Income Tax rates here.

Corporation Tax reduced

Background

Corporation Tax is the tax that limited companies, and some other organisations like clubs and societies, pay to HMRC on their profits.

What’s changed?

Starting on 1st April, Corporation Tax has reduced from 20% to 19% for financial year 2017/18. This means that Britain will have the lowest Corporation Tax rate of the world’s 20 biggest economies.

How could it affect you?

If your business is registered as a limited company, you’ll pay Corporation Tax at a lower rate than you did last year.

National Living Wage rising

Background

The National Living Wage is an obligatory minimum wage payable to workers in the UK aged 25 and over.

What’s changed?

The National Living Wage was raised from £7.20 to £7.50 on 1st April. For anyone under 25, the National Minimum Wage still applies.

How could it affect you?

If you’re an employer, you are legally obliged to pay wages that meet the National Living Wage to any employees aged 25 and over.

National Insurance rates for employers and employees aligned

Background

National Insurance is the money paid to HMRC by employees, employers, and the self-employed.

What’s changed?

As of April 6th 2017, HMRC has aligned the National Insurance threshold for employers and their employees to earnings of £157 per week, or £680 per month.

How could it affect you?

If you have employees, you’ll no longer have to be mindful of two separate thresholds when looking at how much National Insurance you have to deduct and pay. Keep up to date with current National Insurance rates here.


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