2020/21 tax updates for the self-employed

A guide to tax changes impacting freelancers, contractors, and the self-employed

Amid the uncertainty caused by COVID-19, freelancers, contractors and the UK’s wider self-employed population could be forgiven for overlooking the significance of 6th April and what was the beginning of the 2020/21 tax year. 

While the big development (IR35 reform) never materialised, with changes postponed for 12 months, the Government did introduce a number of other small - but nonetheless significant - updates to taxes which have now come into force.

In this article, we’ll take a look at what’s changed, what’s stayed the same and explain how it impacts you as a self-employed worker. 

What's changed?

The National Insurance threshold

The amount at which you’ll be required to make National Insurance (NI) contributions has been raised, from £8,632 to £9,500. It’s a welcome tax cut that 31 million people will benefit from, with self-employed workers expected to save £78 a year. This change is also said to mark a step towards raising the NI threshold to £12,500 in due course.

Entrepreneur’s Relief lifetime limit

The lifetime allowance for what is now known as Business Asset Disposal Relief (formerly Entrepreneur’s Relief) - a tax break that results in Capital Gains Tax (CGT) of 10% when selling all or part of your business - has been lowered, from £10m to £1m. 

While this is a dramatic drop in the amount you can claim in your lifetime, according to the Chancellor, 80% of small business owners will be unaffected by this change, which came into force on 11th March. 

Capital Gains Tax (CGT) rate

The rate at which you’ll need to pay Capital Gains Tax (CGT) - a tax on profit earned when disposing of an asset (whether that’s a property, shares in a business or personal possessions) - has risen, from £12,000 to £12,300. 

Part of this reform includes a change to when you report and pay CGT owed as a result of the sale of a residential property that isn’t your main home. If a sale is made after 6th April 2020, you’ll need to report and settle CGT in 30 days on the Government website. If you sold this property before the changes were enforced, the previous CGT rules apply, with HMRC expecting you to pay this on 31st January - the self-assessment deadline.

What's stayed the same?

Income Tax

Income Tax rates will stay the same for the next 12 months at least, with tax payable on any income received over £12,500 in the financial year. Given the amount you pay above this figure depends on earnings (while taxpayers in Scotland pay a slightly different rate) it’s worth visiting the Government website to get a clearer understanding of how much you’ll be taxed in your self-assessment tax return. 

Tax on dividends

After slashing the tax-free dividend allowance from £5,000 to £2,000 in 2018, the figure at which you pay tax on dividends drawn from a business will stay at £2,000. How much dividend tax is due above this rests on your Income Tax band - basic rate taxpayers will pay 7.5%, higher-rate taxpayers 32.5%, while additional-rate taxpayers must pay 38.1%.

Corporation Tax

After Boris Johnson’s landslide General Election victory in December, the newly-formed Government scrapped the previous administration’s plans to cut Corporation Tax - a tax on company profits - to 17%. Instead, this will stay at 19% for the 2020/21 financial year. 

Value Added Tax (VAT)

The standard rate for VAT - a tax applied to the sale of goods and services - will stay at 20%, with the reduced rate remaining at 5%. The threshold at which a company must register for VAT will be kept at £85,000 - meaning freelancers, contractors and self-employed people who turnover more than this in a year must submit quarterly VAT returns and pay their respective VAT bills.

The IR35 legislation

As touched upon earlier, changes to the off-payroll working rules were dramatically delayed by one year due to COVID-19. This means that contractors operating via their own limited company will remain responsible for determining their IR35 status in the private sector until 6th April 2021 - at which point, medium and large businesses will start administering the rules. 

To help the self-employed navigate COVID-19, the Government recently introduced a number of temporary changes to the tax system. This includes allowing self-employed workers to defer their upcoming self-assessment payment on account, delay VAT payments and apply for more time to file their company accounts. More information on the support available to the self-employed can be found here.