How will National Insurance Contributions increases affect sole traders and landlords?

MPs have voted through Prime Minister Boris Johnson’s 1.25 percentage point increase in National Insurance contributions (NICs), which will be introduced on 6 April 2022.

The NICs rise is part of new government efforts to raise an additional £36bn over three years, money that it says will be used to “tackle the health backlog caused by the Covid pandemic”, with £5.4bn also promised to improve the UK’s ailing social care system.

From 2023, the additional payment will become a separate tax on earned income called the Health and Social Care Levy, which will be calculated in the same way as National Insurance and detailed on payslips. NICs rates will then return to their current level, says the government.

Fair or deeply damaging?

Although Johnson described the NICs hike and other measures as “reasonable and fair”, the opposition, several Tory MPs and business groups such as the CBI, Federation of Small Businesses and British Chambers of Commerce, criticised Johnson’s manifesto promise-breaking tax increase.

Some have gone as far as to describe it as an attack on the self-employed. Andy Chamberlain, Director of Policy at the Association of Independent Professionals and the Self-Employed, said: “The increase in National Insurance for sole traders will be deeply damaging to the wider self-employed sector. While social care is, of course, crucial for the country, after the financial devastation of the pandemic, it’s simply not right that hard-working and often struggling people – particularly the scarred self-employed – should be paying for it.”

National Insurance Contributions increase implications for sole traders

Sole traders pay two types of National Insurance:

  • Class 2 (£3.05 a week) if their profits are £6,515 or more a year and
  • Class 4 if their profits are £9,569 or more a year.

Sole traders currently pay 9% Class 4 NICs on profits between £9,568 and £50,270 and then 2% on anything they earn above that. The changes when introduced in April 2022 will mean they will now pay 1.25% more, which equals 10.25% and 3.25% respectively on their profits.

Many sole traders have employees, of course, and if that includes you, then, sadly, you’re facing a double NICs whammy, as Employers’ Class 1 NICs (also known as secondary contributions) will rise from 13.8% to 15.05%, while employees’ Class 1 NICs will rise by 1.25%. So, for example, an employee earning £20,000 a year who currently pays £1,251 in NICs will pay another £130 a year, while those on £30,000 will be faced with a £255 NICs increase.

NICs increase implications for landlords

Landlords must pay Class 2 NICs if their profits are £6,515 a year or more and they’re running a landlord business (ie being a landlord is their main job, they rent out more than one property and buy new properties to rent out, etc). If their profits are below £6,515, a landlord can make voluntary Class 2 NICs payments to get state benefits, such as pension.

But, as explained on GOV.uk: “You do not pay NICs if you’re not running a [property rental] business  – even if you do work like arranging repairs, advertising for tenants and arranging tenancy agreements.”

Most landlords are not regarded as running a business, so they would not be impacted by the NIC Class 4 increases.

Other tax changes announced  

As well as having to pay higher National Insurance contributions, directors of small limited companies who receive part of their income from dividend payments will pay more tax from April 2022, which has also attracted criticism.

Tax on dividend income will increase by 1.25%. So, after the £2,000 allowance, those in the basic rate for Income Tax will pay 8.75% on dividend payments (currently it’s 7.5%), while those in the higher rate Income Tax band will pay 33.75% (currently 32.5%) and those in the additional rate will pay 39.35% (currently 38.1%).

Kitty Ussher, chief economist at the Institute of Directors, commented: “The surprise new tax on dividends will yet again target small company directors.

“Incorporated sole traders and other owner-managers, who relied on dividend income, were the only group of workers that were not supported by the government during the pandemic. Employees and the self-employed were provided with financial support to tide them over, but this group was not.”

Ussher said the latest tax increases revealed “a total lack of understanding about the very real difficulties faced by owners of the smallest businesses in Britain”. Some directors of small limited companies may even now “disincorporate” and instead operate as a sole trader business, because the small tax advantages may simply no longer exist.

What is the income tax personal allowance for 2020?

WHAT IS A PERSONAL TAX ALLOWANCE?

Much to the disappointment of HMRC, every tax year most UK taxpayers are entitled to a UK personal allowance on their taxable income. To put it simply, most people can receive a certain amount of money before having to pay any income tax. This is what is known as a personal tax allowance.

If you’re struggling to get your head around personal tax allowances, GoSimpleTax is here to explain everything you need to know, simply and easily.

HOW MUCH IS THE STANDARD PERSONAL TAX ALLOWANCE?

The standard personal tax allowance amount is £12,500 for 2019/2020. Any income you earn after that will be taxable. The amount of tax you pay after your personal allowance is dependent on how much you earn during a tax year. For example, If your income is above £100,000, basic personal allowance is reduced by £1 for each £2 you earn over the £100,000 limit, irrespective of age.

Personal Allowance & Tax Thresholds

Personal Tax Allowance2018/20192019/2020
Tax-free personal allowance£11,850£12,500
Basic Tax Rate (20%)£1-£34,500 (after allowance)£1-£37,500 (after allowance)
Higher Tax Rate (40%)Income over £34,500Income over £37,500
Additional Tax Rate (45%)Income over £150,000Income over £150,000

If your tax affairs are a little more complex, for example, if you’re married or in a civil partnership and receive a marriage allowance, or for age-related or income-related reasons, then your personal allowance works a little differently. You could also receive tax-free allowances for:

  • your first £1,000 of income from self-employment
  • your first £1,000 of income from property you rent

HOW DO I GET MY PERSONAL ALLOWANCE?

Getting your personal allowance is simple. If you file a self-assessment tax return, you will automatically receive your tax-free personal allowance.

Is there an easier way to file?

If you need to file a tax return, GoSimpleTax is here to make things unbelievably simple. Forget about long-winded form-filling and unwelcome phone calls with HMRC. Simply enter the details of your income and expenses and we’ll create your tax return for you and submit it online directly to HMRC.

Access GoSimpleTax and discover a new free way of filing your return (HMRC approved), know what expenses will help you lower your tax bill and keep all your records online, safe & sound. Ready to file with one click. Start your free trial today!

Do I need an accountant to do my tax return?

When you realise you have to submit a tax return, you’ll have a lot of questions. ‘When is it due?’ and ‘What do I include?’ will probably be on your list. The one at the very top of it will likely be, ‘Do I need an accountant for a watertight tax return?’.

Some people undertake the DIY method, but doing your taxes for the first time can be scary. Here, we take a look at the benefits and drawbacks of outsourcing this task to an accountant. With the advent of mobile tax software, you may want to avoid them altogether…

WHAT IS A TAX RETURN ACCOUNTANT?

An accountant does many tasks for the taxpayer, and the tax return is one of the biggest – they will file it for you on an annual basis. Other duties include:

  • Keeping on top of your books
  • Claiming expenses
  • Calculating the tax owed
  • Finding savings to reduce your tax liability

HOW MUCH DOES A TAX RETURN ACCOUNTANT COST?

As with any service, a low cost is unlikely to get you great value for money. How much you should pay for a tax return accountant will depend on the amount of work they do for you, but you can easily pay up to £500 for the service described above.

You might find that some quotes are fixed and offer you more services than you require. Additionally, the cost may differ according to the type of tax return you need, and there are specific requirements related to your circumstances too – a general self-employed tax return will be different to that of a sole trader who also has a job or rental income, for example.

DO I NEED AN ACCOUNTANT?

No – GoSimpleTax allows you to easily stay on top of your taxes without the use of an accountant. Our no-jargon tax return software helps you understand and learn how to do your own Self Assessment tax return in minutes, just like an expert.

GoSimpleTax keeps things super simple and enables you to discover tax savings you didn’t even know existed. Just ask Liam, one of our users – he was able to reduce his tax liability by claiming for homeworking costs.

Whether you have a good grasp on your tax savings or you’re clueless when it comes to tax, GoSimpleTax will make sense of everything for you. It means you’ll potentially save hundreds of pounds in accounting fees, whilst still fulfilling your tax obligations and maximising your take-home pay. 

SUBMIT YOUR SELF-EMPLOYED TAX RETURN WITH GOSIMPLETAX

Tax return software is about three things: accuracy, convenience, and zero confusion.

Our Self Assessment software gives you full visibility over your finances. You can see everything in real time and from any device, including your tax liability. It also provides you with tax-saving suggestions by revealing deductible items that will automatically save you money.

‘Do I need an accountant to do my tax return?’ Not with Self Assessment software. GoSimpleTax allows anyone to be a tax expert. Find out for yourself by signing up for our free trial. You can use it to start calculating your tax bill straight away – no credit card required.

Do I Have To Pay Tax As An Online Seller? Guidelines And Boundaries

HMRC believe that, while it is perfectly okay to sell online, individuals often breach boundaries where they are making what constitutes a ‘business profit’. In this case, they may owe tax on profit made through selling on sites like eBay or Depop – and HMRC expects you to disclose such information in your annual Self Assessment return.

Declaring extra income to HMRC can be frustrating if you aren’t confident where you stand. But attempting to operate as an online seller and covering up what could be defined as trade can be potentially devastating for your finances.

That’s why we’ve provided guidance on paying taxes as an online seller.

Do I need to pay taxes if I’m on online seller?

In 2016, the Finance Act empowered HMRC with ‘snooping’ authority to compile information from internet selling sites on ‘self-employed’ individuals who aren’t declaring income. There are certain elements to online selling that the government considers before defining something as a trade. They are:

  • Intention to make a profit as opposed to selling for fun or raise small emergency funds
  • Repetition of similar transactions over a short period of time
  • Money is borrowed to buy an item intended for sale, only to be repaid once the transaction has cleared
  • Inability to prove the items sold gave you a ‘pride of possession’ before being listed
  • The item is sold at a fixed price in a similar fashion to retailers
  • Limited time between purchase and selling, bringing into question the ownership of the seller
  • Modification of items in order to sell them for a greater profit.

For those still asking, “do you have to pay taxes on an online business?”, yes – unless you feel that you aren’t necessarily breaching the above considerations.

How much can you sell on eBay before you have to pay taxes?

HMRC does not want to tax those just hoping to make a small amount on the side. In fact, in 2017, the government agreed to a trading allowance that gave sellers the freedom to earn up to £1,000 in sales without paying anything in tax. The aim was to simplify the tax system and to help the UK “become leaders in the digital and sharing economy”.

It’s not just Ebay sellers that need to be aware of the potential tax trap, Depop, for instance, is a fast-growing community of young sellers that are making a living out of second-hand fashion. There are entrepreneurs earning thousands on the platform, unaware that they may have to pay tax as a sole trader. Gumtree and Etsy sellers are similarly affected by taxes when you sell things online – all being recognised as platforms where sellers are able to evade paying tax, and are therefore in HMRC’s firing line.

What are the consequences of not disclosing online income?

In the more severe cases, online tax evasion could result in prison – as was the case with a user in 2014 who failed to declare their eBay income. As HMRC has the authority to access PayPal information and request extensive details from online auctioning sites, it’s unlikely that such schemes will remain hidden for the foreseeable future. In 2016, approximately 870,000 people failed to submit a Self Assessment return with some cases having noticeably small amounts of income from online sales. This resulted in huge fines for the sellers, with HMRC predicting an increase for years to come.

Thankfully, completing a Self Assessment tax return has never been so straightforward. With GoSimpleTax software, you can see clearly what you need to disclose and how to avoid HMRC penalties. Our online and telephone support can guide you through the Self Assessment process so that it is accurate and transparent.

Interested? Trial our software to see how you can streamline your accounts.

Start your free trial