The end of the tax year is fast approaching, and it is important to use the next few months to organise your finances. You should ensure you have maximised all of your tax-free allowances and have claimed the appropriate tax relief. Our short guide will provide you with a simple checklist of the critical changes you can expect to see in the new tax year.
What is changing in the new tax year?
This information is based on the Government’s manifesto pledges and is subject to change in the Budget, which will be announced in March.
Personal Allowance and Income Tax thresholds
The Personal Allowance for the 2020/21 tax year is not expected to change and will remain at £12,500 – this is tax-free and is applied throughout the UK.
How much tax you will need to pay each year will depend on the tax band which you fall into and how much of your income is above the Personal Allowance. The basic rate threshold for England, Northern Ireland, and Wales will remain the same at £37,500 Taxpayers will fall into the higher-rate tax bracket once their income exceeds £50,000 (inclusive of the personal allowance).
Income Tax bands and rates are slightly different in Scotland and could be subject to change when the Scottish Budget is announced.
VAT Reverse Charge
The VAT reverse charge for construction services will apply from the 1st October 2020, in a bid to tackle fraud in the construction industry. The reverse charge will apply to transactions between VAT-registered businesses, and it will mean the customer is now liable to account for VAT in purchases rather than the supplier. The VAT cash will no longer flow between businesses and will have to be registered and stated on the invoice as a reverse charge.
For more information about the VAT reverse charge, please read our blog.
Capital Gains Tax
From the 6th April 2020, there are three significant changes to capital gains tax: reduction in the final period of exemption, lettings relief, and a 30-day window.
The proposed changes to lettings relief will potentially only be available to landlords who shared occupation of their house with a tenant. Lettings relief can reduce capital gains tax due on the sale of a property as you can claim up to £40,000 individually or up to £80,000 if a partner or spouse jointly owns the property.
The final period of exemption relief can be applied to a property up for sale, provided the property is sold within 18 months of the owners moving out. The owners will not be subject to capital gains tax on the sale of the property. The final period of exemption will be reduced to 9 months, and it will increase the capital gains tax liability for anyone selling their main residence and who has accrued a period of private residence relief.
From April 2020, anyone making a taxable gain from selling a UK residential property must submit a residential property capital gains return within the 30-day window and pay any capital gains tax owed.
For more information about the changes to Capital Gains Tax, please refer to our blog.
Off-Payroll in the Private Sector
IR35 in the private sector – now referred to as off-payroll working in the private sector – is changing from April 2021. Similarly to off-payroll in the public sector, any medium or large private sector businesses hiring contractors or freelancers will be responsible for determining the IR35 status of their workers.
For contracts that are deemed inside IR35, workers are required to have National Insurance and PAYE deducted at source from their income. The ‘fee-payer’ (usually the end client or agency) will be responsible for making the relevant deductions before paying the contractor their net salary.
Umbrella companies are considered the easiest way for contractors and freelancers to get paid. However, there are a few key differences that you need to be aware of when moving from a limited company to an umbrella company.
Inheritance Tax is a tax on the estate of someone who has passed away – how much tax you pay depends on the value of the estate. There is no tax due if the value of the estate is below the £325,000 threshold or everything is left to a civil partner, spouse, amateur sports club or charity.
The residence nil-rate band (RNRB) was introduced in the 2017/18 tax year as an additional tax-free threshold on top of the existing £325,000 allowance if the main residence is passed on. The residence nil-rate band is due to rise to £175,000 in 2020/21 (meaning a total allowance of £500,00).
The lifetime allowance is due to rise to £1.075m for the 2020/21 tax year – in-line with the rate of inflation from September 2019 and subject to rounding up.
The Lifetime Allowance is the tax-free allowance on all of your pensions, including workplace pensions which you can accrue during your lifetime. State pensions and overseas pensions are excluded from this allowance. You will not pay the tax charge on your pension savings until it exceeds the Lifetime Allowance or you reach 75 years of age.
National Living Wage
The national living wage hourly rate for over-25s will increase by 50p to £8.72.
Churchill Knight can offer tailored tax planning and advice
Churchill Knight & Associates Ltd has a range of inclusive contractor accountancy services, which include tailored business tax planning and advice tailored to your circumstances and goals. If you would like more information about our limited company packages, please speak to one of our expert consultants on 01707 871622.