By Contractor Hub, Apr 20 2016 04:00AM
Following the recent 2016 Budget, there have been some tax changes that will take place for the new 2016/2017 tax year.
Here we discuss the changes that will have an effect on the UK’s contracting community:
As expected, the Personal Allowance rate will increase. Previously, the amount of income you can earn before you start paying Income Tax was £10,600, however, this has risen to £11,000, and will then increase to £11,600 in April 2017.
Higher rate of Income tax changes
Those who pay the higher rate threshold of Income Tax will be interested to learn that this rate has now risen from £42,385 to £43. This will increase further to £45,000 in 2017.
National Insurance Contributions
At the moment, those who are self-employed pay two different types of National Insurance Contributions – Class 2 and Class 4.
Contractors pay Class 2 contributions if they take home £5,965 or more a year and this figures equates to £2.80 per week. Class 4 is paid by those earning £8,060 or more annually.
During the Budget it was announced that as from April 2018, Class 2 will be scrapped. Contractors may be concerned, as part of this National Insurance goes towards building a State Pension, however, Class 4 will see some changes that’ll include the benefits that came with Class 2.
All limited company contractors will need to pay Corporation Tax on its taxable profits – this is basically any money that your company makes from doing business, investing and selling assets for more than they cost.
Businesses will benefit from the main rate being cut once again from 20% to 17% in 2020.
VAT registration threshold
Value Added Tax, otherwise known as VAT, is a business tax that is charged on all goods and services.
Previously, If your business’ annual turnover was more than £81,000 you would need to register your business for VAT.
However, this threshold has now increased to £83,000.
The way in which dividends are taxed will be seeing changes with, what the government has said, is a much simpler method, as the dividend tax credit will now be replaced by a new £5,000 tax-free dividend allowance for all taxpayers.
New tax-free allowances
For those who sell goods, provide services or rent out part of their property for storage, they’ll be interested to learn that there will now be a £1,000 tax-free allowance for this type of income.
So, for those who earn up to £1,000 from things like selling goods that they’ve made, or those who rent out part of their property, such as a driveway, garage of loft – they will no longer need to pay tax on that first £1,000.
Personal Savings Allowance
The introduction of the new Personal Savings Allowance will mean that basic rate taxpayers will be able to earn up to £1,000 in savings income tax-free, and higher rate taxpayers can earn up to £500.
This means that most people will no longer pay tax on savings interest and bank and building societies will stop deducting tax from your account interest.
The government will be introducing the Lifetime ISA, which will go live from April 2017.
The purpose of this is to aid people in saving towards either a retirement fund (to use after you are 60) or to buy a first home – with the help of the government too.
Any adult under 40 will be able to open a Lifetime ISA account and up to £4,000 can be saved per year with the government topping up your savings by 25%.