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The new tax year began on 6 April 2018. Our blog highlights some key changes for limited company contractors and freelancers.
There are no drastic changes to legislation for the new tax year, such as IR35 reform. However it’s important to be aware of any changes as a limited company contractor, as it could affect your tax planning.
Try our take home pay calculator for a quick breakdown of your potential income through a limited company in the 2018/19 tax year.
If you don’t have an accountant and need to discuss tax planning, or are thinking of switching accountants, contact us on 01707 871622. Churchill Knight’s accountancy service can help maximise your tax efficiency whilst ensuring HMRC compliance.
Tax changes for the 2018/19 tax year:
Personal allowance
This is the amount you can earn before paying income tax via PAYE.
| 2017/18 | 2018/19 |
| Up to £11,500 – 0% tax | Up to £11,850 – 0% tax |
The change to the personal allowance represents a £70 per year tax saving for most people.
Income tax rates
The new thresholds for income tax in the 2018/19 tax year are:
| 2017/18 | 2018/19 | |
| Basic rate | 20% on earnings above the personal allowance and up to £45,000 | 20% on earnings above the personal allowance and up to £46,350
|
| Higher rate | 40% on earnings from £45,001 to £150,000 | 40% on earnings from £46,351 to £150,000* |
There are no changes to the additional rate threshold for 2018/19.
*Scotland has different income tax rates for 2018/19:
| Starter – 19% | Over £11,850 up to £13,850 |
| Basic – 20% | Over £13,850 up to £24,000 |
| Intermediate – 21% | Over £24,000 up to £44,273 |
| Higher – 41% | Over £44,273 up to £150,000 (personal allowance will be reduced by £1 for every £2 earned over £100,000) |
| Top – 46% | Over £150,000 |
Dividend allowance
From 6 April 2018, the tax-free dividend allowance will be cut from £5,000 to £2,000. This means, assuming you have used your full personal allowance, you can only draw £2,000 in dividends in the 2018/19 tax year before having to pay dividend tax.
You will pay 7.5% dividend tax on dividends over £2,000 and up to £34,500. Dividends drawn over the threshold of £34,500 will be subject to 32.5% tax. The additional rate of 38.1% will be charged on dividends above £150,000.
What does this mean for my finances?
If you operate a limited company, you will have to pay slightly more tax on your annual dividends – which you will pay at the time you file your annual self-assessment tax return.
However, you can still enjoy the benefits of being a limited company contractor and maximise your take home pay with some careful tax planning.
If you’re a Churchill Knight client, your Account Manager will contact you regarding planning your salary and company dividends for the 2018/19 tax year. Alternatively, contact us to discuss your tax planning requirements.
Other 2018/19 tax changes:
Marriage allowance
Millions of couples who are married or in civil partnerships in the UK are unaware of the marriage allowance. It allows one partner to transfer up to a certain amount of their unused personal allowance to their partner who earns more. The partner earning less must have an income below the personal allowance.
The transferable amount available to couples in the 2018/19 tax year will be £1,190 – up from £1,150. This means that a partner earning less than £11,850 per year may transfer up to £1,190 – saving their partner up to £238 per year in tax.
You can find out more about the marriage allowance – including how you can potentially backdate claims – on our marriage allowance blog.
Increases to Class 1 National Insurance thresholds
As a limited company director being paid a salary by your company, you need to pay Class 1A Employee and Employer secondary National Insurance Contributions (NICs).
The government has slightly raised the thresholds at which you pay certain NICs – which will give you a small NI saving in the 2018/19 tax year.
Employee NIC earnings thresholds:
| 2017/18 | 2018/19 | |
| Lower earnings limit – No NICs owed up to this weekly amount earned | £113 | £116 |
| Primary threshold – you pay no NI on up to this amount earned, but you can receive NI credits for earnings between the lower earnings limit and the primary threshold | £157 | £162 |
| Upper earnings limit – you pay 12% on earnings above the primary threshold and up to this limit* | £866 | £892 |
*Weekly earnings above £892 in the 2018/19 tax year will incur a 2% National Insurance liability.
Employer NIC earnings thresholds:
| 2017/18 | 2018/19 | |
| Secondary threshold – weekly salary for an employee or director will incur Employer NICs at 13.8% | £157 | £162 |
Capital Gains annual exemption
A capital gain is an increase in the value of an asset since it was purchased. When you sell or dispose of this asset, you may have to pay Capital Gains Tax on its value increase.
For example, if you purchased a house for £400,000, and whilst you owned it the house increased in value to £450,000 – you would have to pay Capital Gains Tax on £50,000 when you sell it.
The government has increased the tax-free allowance on capital gains from £11,300 to £11,700 – representing a small saving on Capital Gains Tax.
Benefit in Kind tax rates for company cars
The benefit in kind (BiK) tax rates on company cars are increasing in 2018/19. The BiK rate used to calculate tax on your company car – if you have one – depends on its CO2 emission range. The following table outlines some of the changes:
| CO2 emission range | 2017/18 | 2018/19 |
| 0 to 50 g/km | 9% | 13% |
| 51 to 75 g/km | 13% | 16% |
| 76 to 94 g/km | 17% | 19% |
For every increment of 5g/km from 95 g/km, the BiK rate will increase by 1% from the previous tax year’s rates up to 160 g/km.
If you want a company car, it’s more beneficial to choose an ultra-low emission car. For example, for a Toyota Prius Plug-In Hybrid with emissions of 22 g/km at a list price of £30,000, you would pay income tax on £3,900 (13%). However if you chose a BMW 3 Series with CO2 emissions of 118 g/km and a list price of £27,000, you would pay income tax on £6,480 (24% BiK rate).
Additional rates apply to diesel cars.
As a limited company contractor, it may not be beneficial to have a company car – but rather you might find it’s easier and more favourable to use your personal car and claim mileage gained for business purposes. Learn more about claiming limited company expenses.
Student Loan threshold increases
From 6 April, the two earnings thresholds for repaying student loans – Plan 1 and Plan 2 – will increase:
- Plan 1 threshold will increase to £18,330 from £17,775
- Plan 2 threshold will increase to £25,000 from £21,000
Do you have questions on how to repay your student loans as a contractor? Visit our blog for tips or, if you are a client of Churchill Knight, contact us.
Churchill Knight provides an inclusive contractor accountancy service alongside tax planning advice tailored to your circumstances. We can help you legally maximise your take home pay through a limited company – simply request a callback to get started.
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The Churchill Knight blog is regularly updated with helpful content for contractors and freelancers – especially articles that answer the most frequently asked questions about umbrella companies! Please pop back shortly to see the latest articles written by Andrew Trodden (Marketing Manager) and Clare Denison (Marketing Executive).