October Insights

Business owners to be hit by tax and NI increases

The government recently announced a rise in national insurance and dividend tax, by 1.25%. What will it mean for your business…

 

Higher taxes and levies

When they were first announced, the impact of the changes weren’t fully apparent. The first point to note is that the additional 1.25% on NI is a temporary measure for 22/23 only because in 23/24 and after it will be replaced by a new tax known as the health and social care levy.

As far as we know so far, the additional 1.25% on dividend tax won’t be part of the levy but will be a permanent tax rise.

 

NI and Levy

The increase in NI and also the new levy applies not only to employees and directors but also to employers too. It will be paid on earnings over each of the NI thresholds, which currently stand at £9,568 for employees and £8,840 for employers.

The self-employed don’t escape this increase as there will be a corresponding rise in Class 4 NI rates on all profits over the threshold of £9,568.

 

Hidden change

Currently, those over the state pension age don’t pay NI on either their employed salary or self-employed profits. However, the extra 1.25% will apply to their earnings from April 2022.

 

Dividend tax

The dividend tax increase means that director/shareholders cannot escape the extra cost by paying themselves dividends instead of a salary.

From 22/23 onwards the new dividend taxes will increase to 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.

Making Tax Digital for Income Tax and Self-Assessment (MTD ITSA) 

 

For self-employed business owners and landlords.

Those of you who have been with us for a number of years will remember how we announced huge changes that were set to come in regarding the reporting of accounts and tax returns.

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is a new way for self-employed business owners and landlords to report earnings and pay Income Tax.

This was originally due to come into effect in April 2023 but last week it was thankfully postponed until April 2024.

Sole traders, partnerships and landlords with a total business and/or property income (Turnover not profit!) above £10,000 per year will have to comply with MTD for ITSA from their first accounting period starting on or after 1st April 2024.

 

What are the MTD for ITSA rules? 

From April 2024, all affected business owners and landlords will need to: 

• sign up for MTD for ITSA via HMRC’s website 

• keep digital business records (this means no more paper records) 

• use MTD-compatible accounting software Xero

• send quarterly business income and expenses updates to HMRC through the software 

• finalise the business’s income and expenditure in a declaration, which confirms that the updates sent are correct, and make any accounting adjustments, such as capital allowances etc.

• submit this final declaration to HMRC. This will replace the annual Self Assessment tax return. 

 

How often will affected businesses and individuals have to send digital updates? 

Instead of sending a Self Assessment tax return to HMRC once a year, business owners and landlords will have to submit quarterly summary updates of their sales income and expenditure, followed by a final declaration at the end of the year. 

 

Quarterly summaries – what is required and when? 

Quarterly summaries will include total sales income and total expenses, in defined categories, for that period, for each self-employment and property business. The timing of the quarterly updates will be: 

• 1st April to 30th June, to be filed by 5th August

• 1st July to 30th September, to be filed by 5th November

• 1st October to 31st December, to be filed by 5th February

• 1st January to 31st March, to be filed by 5th May

The quarterly updates will give business owners and landlords a year-to-date calculation of how much tax they owe, based on the information provided in the summary. 

 

Final declaration 

Business owners and landlords will also need to use their accounting software to finalise their overall tax position at the end of the year. They will have to add any relevant details about personal income and tax reliefs and include an End of Period Statement (EOPS). 

The final declaration will replace the Self Assessment tax return but the deadline for submission remains the same at 31st January. 

 

What you need to do to prepare

Whilst this seems a long way off at the moment, the whole conversion process will be time-consuming and the information submitted will have to be accurate or HMRC will issue penalties.

In order to prepare for this change in plenty of time, we are recommending that clients who are not yet using Xero accounting software, do so by the beginning of April 2022.

If you would like more information on Xero then please let us know.

 

VAT Rate Changes for Hospitality and Tourism

 The temporarily reduced rate of VAT for hospitality and tourism was introduced by the government in July 2020 and was originally set at 5%, to run until January 2021.

However, due to further lockdowns and damage to the industry this was extended until 30 September 2021.

From 1 October this rate has now increased to 12.5% until 31st March 2022. From 1 April it will revert back to the standard rate of 20%.

Please note that this reduced rate doesn’t apply to alcohol, which is still 20%.

 

What are your plans for the future?

Please do keep in touch and let us know your plans.

And if you are looking for inspiration, ideas or practical tips head over to our New Video and Learning Resource at Brooks Business Hub.