The new tax year for 2019/20 began on Saturday, 6^th April 2019. There are some key changes you need to be aware of that could affect you as a limited company contractor – including a couple of changes that came into effect on the 1^st of April.

What’s changed in the new tax year?

The 2019 Loan Charge

First – the not-so-good news.

You may already be aware of the 2019 Loan Charge. This is a tax charge the government is applying to all known and outstanding disguised remuneration loan payments made between 6^th April 1999 and 5^th April 2019.

The charge came into effect on 5^th April 2019. HMRC urged all of those who used such schemes (and who have outstanding loans) to come forward before this date. After this point, affected taxpayers no longer have the option to settle their tax affairs and will be subject to additional penalties.

The Treasury was asked to complete a review on the impact of the 2019 Loan Charge. This was published on the 25^th of March 2019. Admitting to the negative impact the legislation will have on vulnerable taxpayers, the Treasury is nonetheless went full steam ahead with its implementation.

The Personal Allowance

Thankfully, it’s not all doom and gloom for contractors.

As of 6^th April, the personal allowance has increased, raising your tax-free income. The personal allowance (excluding Scotland) increased from £11,850 to £12,500 for the 2019/20 tax year. This will reduce income tax bills by £130 per year for most people.

Contact us to find out how you can start tax planning for your limited company in the new tax year.

If you have a partner whose income is less than the personal allowance, they may be able to claim the Marriage Allowance and transfer their unused personal allowance to you up to a maximum of £1,250. This can result in a tax saving of up to £250.

Find out more about the Marriage Allowance and how to claim.

The Basic Rate and Higher Rate thresholds

The Basic Rate of income tax (20%) is payable on income earned between £12,501 and £37,500 after the personal allowance has been used. The Higher Rate threshold – the point at which you will start to pay 40% income tax – has therefore increased by £3,650 from the previous tax year (from £46,350 to £50,000 inclusive of the personal allowance).

For example, if you were to earn £48,000 per year in salary you no longer have any income falling within the higher rate tax band as of 6^th April. £12,500 of this would be tax-free, and £35,500 would be subject to 20% income tax within the basic rate of tax.

For the 2019/20 tax year, you will need to pay 40% income tax on salary above £50,000 inclusive of the personal allowance.

The tax you pay on dividends is also dictated by the basic and higher rate tax bands. For example, dividend income within the basic rate tax band is taxed at 7.5%. Dividend income within the higher rate tax band is taxed at 32.5%.

This especially impacts limited company contractors who draw a portion of their limited company income as dividends. Please speak to a member of the Personal Tax Team for your own personalised tax plan for the 2019/20 tax year.

There are no changes to either the rates of dividend tax or the tax-free dividend allowance in the 2019/20 tax year.

Scottish Income Tax

You may have heard that the Scottish government has changed the tax bands and thresholds for Scottish taxpayers. The new bands and thresholds are highlighted below:

Income earned between the thresholds above will be taxed at the relevant tax rate in Scotland.

In Scotland, if you take a salary below the Class 1 National Insurance threshold (below), any dividends you take will not be taxed at the higher rate until your income hits £50,000 per annum. This also applies to taxable savings income such as bank interest.

National Insurance Thresholds

With income tax rate thresholds having increased, so have the National Insurance thresholds for Employee and Employers National Insurance deductions.

Here are the changes to the various thresholds of National Insurance:

National Minimum Wage

The National Minimum Wage and National Living Wage have also increased as of the 1^st of April.

Prior to 1^st April, the NMW was £7.38 per hour for earners over 21 and under 25 years of age. This has now increased to £7.70 per hour. The NLW – the minimum hourly rate for earners over 25 years of age – has increased from £7.83 per hour to £8.21 per hour.

Pension lifetime allowance

The lifetime allowance for pension savings was raised in-line with inflation from £1,030,000 to £1,055,000 on 6^th April.

The lifetime allowance is a limit on the amount that can be drawn from pension schemes without triggering an extra tax charge (25% if drawn as income).

It’s mostly good news for contractors

For most limited company contractors, and even umbrella company employees, the coming changes in the 2019/20 tax year are welcome. With the increase of the personal allowance, basic rate and higher rate thresholds increasing, most taxpayers will make a tax saving.

However, those who are affected by the 2019 Loan Charge are urged to explore their options with a tax/legal adviser moving forward if they did not contact HMRC to settle before 5th April.

It is important to note that the 6^th of April 2019 marked one year from when Off-payroll working in the Private Sector rules are changing. From 6^th April 2020, large and medium-sized organisations in the private sector will be responsible for determining the IR35 status of their contractors’ working arrangements.

The government is currently in consultation on the legislation, which will conclude on 28^th May 2019. Watch the Churchill Knight blog to keep up to date with the latest developments on Off-payroll working in the private sector.

Try our contractor calculator to find out your potential income through a limited company vs an umbrella company in the 2019/20 tax year.

* Calculator for illustration purposes only and uses assumptions. Limited figures based on 52 weeks, expenses £50 per week, £9,100 salary and accountancy fees included. As of 1st April 2023, there is no longer a single rate of Corporation Tax. The calculator uses assumptions and estimates and is designed to be accurate by individual circumstances will vary. Umbrella figures based on 52 weeks, £15 per week margin and holiday pay paid out. For a more accurate calculation tailored to your requirements, please contact Churchill Knight today by calling 01707 871 622 or contact us here.