In what might prove one of the toughest years for UK workers, there have been a series of tax changes for 2020/2021 that individuals should also be conscious of. Otherwise, they run the risk of being penalised and subsequently threatening their profitability.
But it isn’t all doom and gloom. Some of the changes have positive implications that will allow those who earn outside of PAYE to increase their take-home pay. However, there are some changes that may have a negative impact on your tax bill – in which case, it’s important to assess the damage sooner rather than later.
So, to help you stay on the right side of the taxman, we’ve detailed below the incoming changes for the 2020/21 tax year and how they will impact the way you pay Income Tax and other taxes moving forwards.
The VAT reverse charge
If you work in construction, there’s a significant change coming your way in October 2020. This move was meant to be happening in October 2019; however, it was postponed to allow businesses to focus on Brexit.
The VAT domestic reverse charge for building and construction services, otherwise known as the reverse charge, is an extension of the Construction Industry Scheme (CIS). It applies only to transactions reported under the CIS and conducted between VAT-registered contractors and subcontractors.
In short, the legislation means that those who supply services (within construction) to a VAT-registered customer will no longer have to account for the VAT. According to the new tax system starting in October 2020, the customer will instead account for the VAT themselves.
In cases of subcontractors, the contractor employing them will now wholly handle VAT and pay it directly to HMRC – thus reducing the total tax you pay.
Capital Gains Tax allowance set to increase
For those looking to sell their chargeable assets, you may also see a decrease in the amount of tax you owe. Capital Gains Tax is set to be reduced due to a change in the allowance threshold.
Currently, Capital Gains Tax applies on the profit made when an asset (a property that’s not your home, for example) has increased in value. There is an allowance of up to £12,000 that allows you to retain anything that sits within that bracket before being taxed. In April 2020, this bracket will be increasing, and the Capital Gains Tax allowance will extend to £12,300.
All profits exceeding that will still be taxed at 10% (18% on property) for basic-rate taxpayers and 20% (28% on property) for higher or additional-rate taxpayers. You will also need to pay this tax within 30 days of asset disposal if that asset is a UK residential property.
Inheritance Tax changes for direct descendants
Inheritance Tax determines how much you pay on the estate of someone who has passed away. Originally, the tax-free threshold stood at £325,000, which has remained the same since its inception. However, rising property prices have meant that increasing numbers of taxpayers have had to pay out large sums of money.
At the time, you wouldn’t pay any tax if the wealth of the inheritance fell beneath the rate threshold or if everything is left to a civil partner, spouse, amateur sports club or charity.
As of 2017/18, however, there’s an additional threshold if the main residence is passed on to a child or grandchild – the residence nil-rate band. This is set to increase from £125,000 to £175,000 in 2020 to 2021.
This is designed to make it easier for direct descendants to pass on family homes without incurring too heavy a cost.
Pension tax relief threshold is increasing
In March 2020, it was announced that the annual pension allowance would be increasing its threshold from £110,000 to £200,000. Before, if you were earning over £110,000, your annual allowance for that year would reduce by £1 for every £2 of ‘adjusted income’ that exceeds £150,000.
Adjusted income is all income plus any pension contributions paid by an employer. However, from April 2020, this will now only impact those earning above £240,000 (as they are still entitled to their £40,000 basic pension allowance).
In addition, the government also announced that the lifetime allowance would be rising to £1.075m in line with inflation.
The lifetime allowance is tax-free and applies to all pensions, including work pensions, which you can accrue during your lifetime. Both overseas and state pensions are excluded, but you won’t pay the tax charge on your pensions savings until it exceeds the allowance or you exceed the state pension age (75 years).
Personal Allowance stays the same
It may come as a relief to hear that last year’s changes to Personal Allowance will remain the same. The same is true of your tax bands and consequently the rate of Income Tax you’re expected to pay.
Personal Allowance is the set amount of income that you’re guaranteed not to pay tax on. In 2019/20, this extended from £11,850 to £12,500. The amount you earn after you hit £12,500 is then taxed according to income. This is known as your Income Tax threshold.
Following 2019/20’s changes, basic-rate taxpayers (those with an income of £1-£37,500, after allowance) now pay 20% on earnings. Higher-rate taxpayers (those with an income above £37,500) pay 40%. There is also a higher rate of Income Tax known as the ‘additional rate’ that is set at 45% for income over £150,000.
There are additional allowances that you may be eligible for, including both the first £1,000 you earn from self-employment and the first £1,000 you earn from rented property. Both of these may impact your tax rate though, so be sure to check ahead of your Self Assessment tax return if you qualify.
How GoSimpleTax can help
To recap, then, the tax changes for 2020/2021 include the new VAT reverse charge tax system and alterations to thresholds for Capital Gains Tax allowance, the Inheritance Tax nil-rate band and pension tax relief.
These changes impact basic-rate taxpayers, higher-rate taxpayers and additional-rate taxpayers alike. For this reason, it’s important to revisit your Income Tax thresholds and ensure that you’ve not unknowingly entered a different tax band.
We understand how tough it can be to stay on top of taxation changes without outside help – resulting in either an unnecessarily high tax bill or an incorrect Self Assessment tax return. That’s why we’ve built a solution that provides helpful prompts on minimising your tax liability where possible.
Our tax return software uses the income and expenditure information you upload to calculate the tax you owe in real time. Interested? Reduce your dependence on accountants today by speaking to a member of our team.