There are potentially significant changes to tax rules in 2021/22 that self-employed individuals and small business owners should be aware of. These changes include revisions to the self-employed tax threshold (how much you may earn as a self-employed person before taxes) and the implementation of a new points-based tax penalty system.
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The tax threshold and personal allowance are rising.
For the past two years, the self-employed personal allowance has stayed at £12,500. For 2021/22, this will rise from £12,500 to £12,570. In addition, the higher-rate tax threshold will be raised from £50,000 to £50,270.
The threshold rates will remain at this levels until 2026. While this means self-employed people would pay less tax initially, it is possible that they will pay more in the long run because rates will not rise in accordance with inflation.
The decreased VAT rate will remain in effect until September.
The government offered a temporary 5% VAT reduction for certain industries in July 2020. This VAT decrease was part of a slew of government subsidies and assistance programmes made available to businesses as a result of the coronavirus outbreak.
The reduced VAT rate of 5% is being extended until the end of September. It will then rise to 12.5% for six months before returning to the usual 20% rate in April 2022.
A new point-based tax penalty system is being implemented.
The government is implementing a new point-based system for VAT and Self-Assessment fines. HMRC stated that the new method is intended to punish taxpayers who habitually submit returns and pay late, rather than penalising people who make one-time errors. The amendments were announced in the Budget for 2021, but they will not take effect until April 2022 for VAT and April 2023 for Self-Assessment.
Self-employed taxpayers will receive a point for each late tax return and a £200 penalty if they reach a specific number of points under the new system. The £200 penalty threshold is determined by how frequently they must file tax returns.
The national insurance thresholds are rising.
Self-employed individuals often pay Class 2 and Class 4 National Insurance via their yearly Self-Assessment tax return. If they hire employees, businesses must also pay employer National Insurance contributions. Some of the National Insurance levels will change in 2021/22...
National insurance classes 2 and 4
The Class 2 NI threshold is being raised from £6,475 to £6,515 per year.The Class 4 NI threshold has been raised from £9,500 to £9,568.The 40% higher-rate NI threshold is being raised from £50,000 to £50,270.National Employer Insurance
The secondary earnings threshold (the point at which employers must begin paying NI) is rising from £8,788 to £8,840.Changes to the IR35 rules are being implemented.
The modifications to IR35 rules, sometimes known as 'off-payroll working' laws, were scheduled for April 2020 but were postponed by a year due to the coronavirus epidemic.
IR35 was implemented because HMRC sought to crack down on self-employed people who used a limited business (also known as a personal service corporation) to avoid paying tax. According to the most recent amendments, employers in both the private and governmental sectors who hire contractors will be responsible for determining their IR35 status.
The capital gains tax exemption has been frozen.
When self-employed workers or small business owners earn from the sale of business assets such as property, machinery, or shares, they must pay Capital Gains Tax (CGT).
The government has confirmed that the Capital Gains Tax allowance will remain at £12,300 until 2026.
This means that the first £12,300 in profit (gains) will be tax-free for the foreseeable future. However, because this sum does not rise in line with inflation, the CGT freeze may result in taxpayers owing more money in the long run.
The stamp duty tax freeze has been renewed.
Stamp duty is a tax levied on the purchase of real estate in England and Northern Ireland. Stamp duty is generally paid on houses worth £125,000, however this will be increased to £500,000 in July 2020.
The stamp duty exemption for the first £500,000 was set to expire on March 31, 2020. However, the administration has extended this deadline to June 30, 2021. The threshold will subsequently be reduced to £250,000 until September 30, 2021, before returning to regular levels on October 1, 2021.
This tax relief will benefit self-employed individuals and small business owners wishing to purchase real estate, as long as they do so before the deadline.
After reading the post, if you have any questions about accounting, please do not hesitate to contact Cruseburke Accounting Services.
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