Self-employed tax changes for 2021/22

There are some notable changes to tax rules in 2021/22 that self-employed people and small business owners will want to know. These changes include updates to the self-employed tax threshold (how much you can earn self-employed before tax) and the introduction of a new points-based system for tax penalties.

 Here, AXA summarises the main self-employed tax changes for 2021/22. 

Tax threshold and personal allowance is increasing

The self-employed personal allowance has remained at £12,500 for the last two years. This is increasing from £12,500 to £12,570 for 2021/22.  The higher-rate tax threshold will also increase from £50,000 to £50,270.

The threshold rates will be frozen at these amounts until 2026. And while that means self-employed people will pay less tax initially, it could mean they pay more in the long-term as rates won’t increase in line with inflation.

The reduced VAT rate will be extended until September

In July 2020, the government announced a temporary 5% reduced rate of VAT for certain industries.  This reduction in VAT was part of a range of government grants and support packages available to businesses because of the coronavirus pandemic.

The 5% reduced rate of VAT is being extended until the end of September. It will then increase to 12.5% for six months before returning to the standard 20% rate from April 2022.

A new points-based system for tax penalties is being introduced

The government is introducing a new points-based system for VAT and Self-Assessment penalties. HMRC said the new system is designed to punish those who consistently submit returns and pay late, rather than penalising taxpayers for making one-off mistakes. The changes were announced in the 2021 Budget, but they won’t come into effect until April 2022 for VAT and April 2023 for Self-Assessment.

The new system means self-employed taxpayers will get a point for every late tax return and a £200 penalty when they reach a certain number of points. The £200 penalty threshold depends on how often they need to submit tax returns.

Find out more about the new points-based penalty system on GOV.UK here.

National insurance thresholds are increasing

Self-employed people usually pay Class 2 and Class 4 National Insurance through their annual Self-Assessment tax return. If they employ staff, they also need to pay employer National Insurance contributions. Some of the National Insurance thresholds are changing from 2021/22…

Class 2 and Class 4 National insurance

• Class 2 NI threshold is increasing from £6,475 to £6,515
• Class 4 NI threshold is increasing from £9,500 to £9,568
• The 40% higher-rate NI threshold is increasing from £50,000 to £50,270.

Employer National Insurance

• The secondary earnings threshold (when employers begin to pay NI) is increasing from £8,788 to £8,840

To find out more about the National Insurance rates and thresholds for 2021/22, visit GOV.UK here.

Changes to IR35 rules are being introduced

The changes to IR35 rules, or ‘off-payroll working’ rules, were planned for April 2020 but were delayed by a year because of the coronavirus pandemic.

IR35 was introduced because HMRC wanted to clamp down on self-employed people who worked through a limited company (often known as a personal service company) in an attempt to pay less tax.  The most recent changes mean that both private and public sector employers hiring contractors will be responsible for determining their IR35 status.

Find out more about the changes to IR35 here.

Capital gains tax allowance is being frozen

Self-employed people or small business owners pay Capital Gains Tax (CGT) when they profit from selling business assets like property, machinery or shares.   

The government confirmed that Capital Gains Tax allowance will be frozen at £12,300 until 2026.

This means that the first £12,300 of profit (gains) will continue to be tax-free for the next few years. However, because this amount isn’t rising with inflation, this freeze in CGT could see taxpayers owing more money in the long-term.  

The freeze on stamp duty tax is being extended

Stamp duty is a tax paid on property purchases in England and Northern Ireland. People usually pay stamp duty on properties costing £125,000, but this was raised to £500,000 in July 2020.

The stamp duty holiday for the first £500,000 was due to end on 31 March 2020. However, the government has extended this to 30 June 2021. From then, the threshold will drop to £250,000 until 30 September 2021 and return to normal levels from 1 October 2021.

This tax break will help self-employed people and small business owners looking to buy property – as long as they do so before the deadline.

Are there any other changes in 2021/22 self-employed or small business owners need to know?

Chancellor Rishi Sunak’s 2021 Budget really focused on how the government could support small business owners and self-employed people. Sunak confirmed that a number of existing schemes (e.g. furlough) would be extended and also announced a number of new support measures and grants.   

Find out more about the changes affecting self-employed people and small business owners by reading AXA’s summary of the 2021 Budget here.