Tax & admin · 15 May 2018

Taking the new tax rules into account: From digital reporting to VAT and pensions

Making Tax Digital
The switch to a fully digitised tax system has been pushed back until at least 2020

With the new tax year in full swing, chief FreeAgent accountant, Emily Coltman, explains the most important tax changes for this coming 2018/19 tax year you need to know about if you run a small business.

The new tax year kicked off on April 6 2018, bringing with it a range of previously-announced rule changes. 

Making Tax Digital: time to get ready

Is your business registered for VAT and does it have to be registered because its sales are over the threshold? Making Tax Digital (MTD) reporting for VAT will become compulsory from 1 April 2019 for all businesses who are, and have to be, registered for VAT.

Why is this relevant now? If you prepare your accounts to 31 March every year and you’re not yet using digital software to keep your books, 1 April 2018 would be the best time to move across to a digital system so that you’re ready and prepared for MTD to start, because an accounting year end is the easiest time to switch system.

If you’re trying to get to grips with a new bookkeeping system and a new filing method at the same time, it will make life harder for you, so we suggest you get ready early!

Dividend allowance falls

6 April 2018 sees the 0 per cent tax allowance for dividends fall from £5,000 to £2,000 a year. That means if you are a sole director/shareholder of a limited company and you withdraw money from the company in a mixture of salary and dividends, your tax bill may go up. Do talk to your accountant about tax planning.

Pension contributions going up for the first time

There is an increase in the minimum contributions for automatic enrolment pensions, with the current combined minimum contribution of 2 per cent rising to 5 per cent. As before, the employer and the employee can choose to pay more than the minimum contributions if they want to.

Date

Employer minimum contribution

Employee minimum contribution

Total minimum contribution

Before 5 April 2018 1 per cent 1 per cent 2 per cent
6 April 2018 to 5 April 2019 2 per cent 3 per cent 5 per cent
6 April 2019 onwards 3 per cent 5 per cent 8 per cent

VAT registration threshold stays the same

The VAT registration threshold usually rises every year at the beginning of April, but this year it’s not going to. The Autumn Budget 2017 held the VAT registration threshold at £85,000 for a further 2 years, starting from 1st April 2018.

This represents a decrease in the threshold in real terms, since inflation is still rising.

Scottish rates of income tax changes

If you’re a Scottish taxpayer, you’ll suddenly be subject to several more rates of income tax than anyone in the rest of the UK.

Here are the new Scottish rates of income tax that will apply from 6th April 2018, for taxpayers who receive the standard UK Personal Allowance;

Band

Band name

Rate

£11,851 – £13,850 Starter rate 19 per cent
£13,851 – £24,000 Basic rate 20 per cent
£24,001 – £43,430 Intermediate rate 21 per cent
£43,431 – £150,000 Higher rate 41 per cent
£150,001 and over Top rate 46 per cent

The Personal Allowance will reduce by £1 for every £2 of income above £100,000.

These rates and bands apply only to income which is neither dividend income nor savings income. So, for example, if you are a sole director of a limited company, and you’re a Scottish taxpayer, you’ll pay tax on your salary at Scottish rates, but on your dividend income, you’ll pay tax at the rates applying to the rest of the UK.

HMRC have now said that marriage allowance will be given at 20 per cent regardless of whether the spouses are Scottish taxpayers or based in the rest of the UK.

Increase in key rates and thresholds

Here’s a brief summary of some of the rates and thresholds increases for 2018/19. All of these are for the full tax year unless otherwise stated:

Details

2018/19

2017/18

Personal Allowance £11,850 £11,500
Employee’s and employer’s NI becomes due at £8,424 £8,164
Higher rate tax becomes due at* £46,350 £45,000
Class 2 NI becomes due when profits pass £6,205 £6,025
Class 2 NI per week £2.95 £2.85

*Except in Scotland

You can keep up to date with current tax rates here; all listed rates, thresholds, limits and charges are updated every time a change is made so you’ll always know where you and your business stand with the taxman.

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ABOUT THE EXPERT

Emily Coltman is chief accountant to FreeAgent, provider of cloud accounting software for freelancers, micro businesses and accountants. She is passionate about helping the owners of small and growing businesses to escape their “fear of the numbers” and she translates small business finance and tax into practical common sense speak.

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