[Guest post] 2023/24 tax year changes that sole traders should know about
One of the most important dates for UK sole traders is April 6, because it signals the start of the new UK tax year.
It’s the day when most UK tax rule changes come into force – and that can make a big difference to your self-employed sole trader take-home. The start of a new tax year can also be the perfect time to get into better tax-admin habits and try to find ways to reduce your tax bill.
So, what key tax changes are planned from 6 April 2023 and how could they impact you if you’re a self-employed sole trader?
Although this will only impact higher-earning sole traders and ordinary partnership members, on 6 April 2023 the Income Tax additional rate threshold (ART) will be reduced from £150,000 to £125,140 a year.
Why that figure? Well, when you earn £125,140 or more a year, you don’t get the £12,570 standard Personal Allowance (PA), because £1 of the PA is taken away for every £2 of your income that’s above £100,000.
According to HMRC, about 232,000 more taxpayers will now have to pay the additional rate of Income Tax, which would not have been the case had the threshold remained at £150,000. For sole traders with income between £125,140 and £150,000, the average cash loss will be £621 in 2023/24, says HMRC. Sole traders with income above £150,000, on average, will be £1,256 worse off in 2023/24.
The additional rate of Income Tax will remain at 45% in England, Wales and Northern Ireland, but it will rise from 46% to 47% in Scotland from April 2023. The higher rate of Income Tax in Scotland will also go up from 41% to 42%, which will impact the take-home of higher-earning sole traders in Scotland.
National Insurance contributions
Self-employed sole traders usually pay two types of National Insurance contributions: Class 2 and Class 4.
- From 6 April, the Class 2 NIC threshold remains the same; they’re payable on income of more than £6,725 a year, but they are to rise by 30p to £3.45 per week.
- The Class 4 NIC threshold (“Lower Profits Limit”) will increase from 6 April 2023 from £11,908 to £12,570. However, the Class 4 NIC rate will decrease from 9.73% to 9%, which is payable on income of £12,570 to £50,270, with 2% Class 4s payable on income above £50,270.
Capital Gains Tax
If you sell a “chargeable asset” such as land, property, plant, machinery, shares, registered trademarks or “goodwill” (ie your business’s reputation) etc, after 6 April 2023, you could end up paying thousands of pounds more in Capital Gains Tax (CGT).
That’s because the annual exempt amount (AEA – how much gain you can make after disposing of an asset before CGT is due) will decrease from £12,300 to £6,000 in 2023/24. From 6 April 2024, the AEA will again be reduced to just £3,000 for sole traders and others.
After the AEA is accounted for, basic rate Income Tax payers pay 18% CGT on gains made from selling residential property (10% on gains from other chargeable assets). Higher-rate Income Tax payers pay 28% CGT on gains made from selling residential property and 20% on gains from disposal of other chargeable assets.
Many sole traders earn additional income from share dividend payments. They won’t welcome the news that from 6 April 2023, the Dividend Allowance will be reduced from £2,000 to £1,000. This is the amount that you can earn in dividend payments before tax is payable. In April 2024, the Dividend Allowance will again be halved to just £500.
The amount of tax you pay on dividend income above the Dividend Allowance, after the Personal Allowance, depends on your Income Tax band;
- Basic rate (£12,571 to £50,270 taxable income) = 8.75%.
- Higher rate (£50,271 to £125,140 taxable income after 6 April) = 33.75%.
- Additional rate (over £125,140 taxable income from 6 April) = 39.35%.
Making Tax Digital
In late 2022, HMRC announced its decision to delay introducing Making Tax Digital for Income Tax (MTD for ITSA). It was supposed to be introduced from April 2024, for sole traders and landlords with a taxable income of more than £10,000. Many sole traders may have decided to voluntarily start complying with MTD requirements from April 2023.
However, the first phase of MTD for ITSA won’t now be introduced until April 2026 and it will only apply to sole traders and landlords with taxable income of more than £50,000 a year, so it will impact far fewer people in the first phase. Further phases of introduction are planned after April 2026, although it’s not yet clear when sole traders earning below £30,000 a year will be affected.
How will MTD change reporting requirements?
- Under MTD for ITSA, sole traders must maintain digital records of their income and expenses and send a digital quarterly summary to HMRC using MTD-compatible software (or “bridging software” that enables compliance with MTD reporting requirements while using existing accounting software).
- Then, at the end of the year, you must send a digital statement to HMRC, confirming that the figures you’ve submitted are correct, with any accounting adjustments made.
- You’ll also need to make a final declaration, confirming any other income that you’ve received. HMRC will then confirm how much tax you owe, although you’ll have a rough idea at the end of each quarter.
Could you pay less tax?
You can file your 2022-23 Self Assessment tax return any time from 6 April 2023. According to HMRC, 66,465 2021/22 Self Assessment tax returns were filed on 6 April 2022 (almost twice the 36,939 Self Assessment tax returns filed on 6 April 2018). You don’t have to do it so early, but the sooner you do it, the better.
Not only will it mean you avoid the hassle each year that comes from leaving your Self Assessment tax return until January (the online filing deadline is midnight on the 31st), but also you can find out much sooner whether you can get a tax rebate.
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