The new tax year for 2019/20 began on Saturday, 6th April 2019. There are some key changes you need to be aware of that could affect you as a limited company contractor – including a couple of changes that came into effect on the 1st of April.
What’s changed in the new tax year?
The 2019 Loan Charge
First – the not-so-good news.
You may already be aware of the 2019 Loan Charge. This is a tax charge the government is applying to all known and outstanding disguised remuneration loan payments made between 6th April 1999 and 5th April 2019.
The charge came into effect on 5th April 2019. HMRC urged all of those who used such schemes (and who have outstanding loans) to come forward before this date. After this point, affected taxpayers no longer have the option to settle their tax affairs and will be subject to additional penalties.
The Treasury was asked to complete a review on the impact of the 2019 Loan Charge. This was published on the 25th of March 2019. Admitting to the negative impact the legislation will have on vulnerable taxpayers, the Treasury is nonetheless went full steam ahead with its implementation.
The Personal Allowance
Thankfully, it’s not all doom and gloom for contractors.
As of 6th April, the personal allowance has increased, raising your tax-free income. The personal allowance (excluding Scotland) increased from £11,850 to £12,500 for the 2019/20 tax year. This will reduce income tax bills by £130 per year for most people.
Contact us to find out how you can start tax planning for your limited company in the new tax year.
If you have a partner whose income is less than the personal allowance, they may be able to claim the Marriage Allowance and transfer their unused personal allowance to you up to a maximum of £1,250. This can result in a tax saving of up to £250.
Find out more about the Marriage Allowance and how to claim.
The Basic Rate and Higher Rate thresholds
The Basic Rate of income tax (20%) is payable on income earned between £12,501 and £37,500 after the personal allowance has been used. The Higher Rate threshold – the point at which you will start to pay 40% income tax – has therefore increased by £3,650 from the previous tax year (from £46,350 to £50,000 inclusive of the personal allowance).
For example, if you were to earn £48,000 per year in salary you no longer have any income falling within the higher rate tax band as of 6th April. £12,500 of this would be tax-free, and £35,500 would be subject to 20% income tax within the basic rate of tax.
For the 2019/20 tax year, you will need to pay 40% income tax on salary above £50,000 inclusive of the personal allowance.
The tax you pay on dividends is also dictated by the basic and higher rate tax bands. For example, dividend income within the basic rate tax band is taxed at 7.5%. Dividend income within the higher rate tax band is taxed at 32.5%.
This especially impacts limited company contractors who draw a portion of their limited company income as dividends. Please speak to a member of the Personal Tax Team for your own personalised tax plan for the 2019/20 tax year.
There are no changes to either the rates of dividend tax or the tax-free dividend allowance in the 2019/20 tax year.
Scottish Income Tax
You may have heard that the Scottish government has changed the tax bands and thresholds for Scottish taxpayers. The new bands and thresholds are highlighted below:
|Tax Band||Tax Rate||2019/20 tax year Bands and Thresholds|
|Starter rate||19%||£12,500 – £14,549|
|Basic rate||20%||£14,550 – £24,944|
|Intermediate||21%||£24,945 – £43,430|
|Higher rate||41%||£43,431 – £150,000|
|Additional rate||46%||Over £150,000|
Income earned between the thresholds above will be taxed at the relevant tax rate in Scotland.
In Scotland, if you take a salary below the Class 1 National Insurance threshold (below), any dividends you take will not be taxed at the higher rate until your income hits £50,000 per annum. This also applies to taxable savings income such as bank interest.
National Insurance Thresholds
With income tax rate thresholds having increased, so have the National Insurance thresholds for Employee and Employers National Insurance deductions.
Here are the changes to the various thresholds of National Insurance:
|NI type||Rate||2019/20 Earnings||2018/19 Earnings|
|Class 1 – employees NI||12%||£8,632 – £50,000||£8,424 – £46,350|
|2%||Over £50,000||Over £46,350|
|Class 1 – employers NI||13.8%||Over £8,632||Over £8,424|
National Minimum Wage
The National Minimum Wage and National Living Wage have also increased as of the 1st of April.
Prior to 1st April, the NMW was £7.38 per hour for earners over 21 and under 25 years of age. This has now increased to £7.70 per hour. The NLW – the minimum hourly rate for earners over 25 years of age – has increased from £7.83 per hour to £8.21 per hour.
Pension lifetime allowance
The lifetime allowance for pension savings was raised in-line with inflation from £1,030,000 to £1,055,000 on 6th April.
The lifetime allowance is a limit on the amount that can be drawn from pension schemes without triggering an extra tax charge (25% if drawn as income).
It’s mostly good news for contractors
For most limited company contractors, and even umbrella company employees, the coming changes in the 2019/20 tax year are welcome. With the increase of the personal allowance, basic rate and higher rate thresholds increasing, most taxpayers will make a tax saving.
However, those who are affected by the 2019 Loan Charge are urged to explore their options with a tax/legal adviser moving forward if they did not contact HMRC to settle before 5th April.
It is important to note that the 6th of April 2019 marked one year from when Off-payroll working in the Private Sector rules are changing. From 6th April 2020, large and medium-sized organisations in the private sector will be responsible for determining the IR35 status of their contractors’ working arrangements.
The government is currently in consultation on the legislation, which will conclude on 28th May 2019. Watch the Churchill Knight blog to keep up to date with the latest developments on Off-payroll working in the private sector.
Try our contractor calculator to find out your potential income through a limited company vs an umbrella company in the 2019/20 tax year.