Changes to tax and NIC from April 2018
From the beginning of April 2018 the personal tax allowance will increase to £11,850 per year. Tax rates will be:
England and Wales
|Basic rate 20%||On the next £34,500 above the personal tax allowance|
|Higher rate 40%||On £34,501 to £150,000 (the personal allowance reduces once earnings reach £100,000)|
|Additional rate||On earnings above £150,000|
Scottish rates and bands
On the 20 February 2018 the Scottish Parliament set the following income tax rates and bands for 2018/19.
|Bands||Band name||Rates (%)|
|Over £11,850*-£13,850||Starter Rate||19|
|Over £13,850-£24,000||Basic Rate||20|
|Over £24,000-£43,430||Intermediate Rate||21|
|Over £43,430-£150,000**||Higher Rate||41|
|Above £150,000**||Top Rate||46|
Tax on Dividends
The dividend allowance of £5,000 at 0% personal income tax, will reduce to £2,000 per year from April 2018. Shareholders will be worse off by £225, £975 or £1,143 a year depending on whether they pay tax at the basic rate, higher rate or the additional rate. Dividend tax rates have not changed, and the rate of tax on dividends remains at 7.5% for basic rate taxpayers, 32.5% above the higher rate threshold and 38.1% for those in the additional rate band (ie. Earning over £150,000). For many owner-directors, the dividend/salary split will still be the most tax efficient method of remuneration, but it may not suit all.
Corporation tax remains at 19%
Self-employed people will continue to pay Class 4 and Class 2 National Insurance Contributions (NIC). The abolition of Class 2 NIC was scheduled for this April, but it has been delayed until April 2019. Class 4 NIC will be 9% on profits over £8,424. Class 2 NIC will be £2.95 per week, to be added to your 2018/19 tax bill as one total for the tax year.
The national living and minimum wage rates increase from 1st April 2018 to:
|Category of worker||Hourly rate|
|Aged 25 and above (national living wage rate)||£7.83|
|Aged 21 to 24 inclusive||£7.38|
|Aged 18 to 20 inclusive||£5.90|
|Aged under 18 (but above compulsory school leaving age)||£4.20|
|Apprentices aged under 19||£3.70|
|Apprentices aged 19 and over, but in the first year of their apprenticeship||£3.70|
Minimum auto-enrolment (workplace pension) contributions have been 1% from both the employee and employer. From 1st April this changes to 3% contributions paid by the employee, and 2% paid by the employer. This will change again in April 2019.
Something not directly related to tax and accountancy, but that will affect all businesses will be the introduction of the General Data Protection Regulation (GDPR). This is a fairly significant upgrade from the Data Protection Act 1998, which just wasn’t sufficient for the online environment that we use now. The GDPR comes into effect from 25th May 2018. There is no exemption for small business, and fines for non-compliance will be from 4% of turnover.
Businesses complying with the DPA 1998 shouldn’t have too much trouble preparing for 25th May, but assessing the data you hold, documenting what you do with it, rewriting policies and communicating with data subjects (customers, suppliers, employees) can be time consuming. The ICO website is a good place to start, if you’ve not already looked at this.
Making tax Digital (MTD)
Making tax digital (aka quarterly accounting), has been delayed for a couple of years. It will start for VAT only from April 2019. The new rules will encompass VAT registered businesses with a turnover above the VAT threshold (currently £85,000) From 1st April 2019 records will need to be kept using ‘functional, compatible’ software. Compatible meaning it must be able to upload information direct to HMRC each quarter.
MTD for income tax, corporation tax etc. will follow after 2019. It will mean 5 updates to HMRC being made each year, instead of the one annual tax return. There will be an obligation to keep records electronically. You’ll upload sales, expenses and profit figures each quarter, then a 5th report (if necessary) will be used to claim allowances and reliefs that are not included in normal day-to-day bookkeeping.
The well-known software companies are developing solutions, as well as some of the lesser known software houses. HMRC has said it will not be providing free software, as it currently does for both VAT and personal self-assessment tax returns.
This is a very brief summary, and there could be many other factors to consider in your own business. If you’d like any help with your tax, bookkeeping or accountancy, please get in touch.