Several changes that could affect your tax bill took effect as the new financial year began this week.
Here are six big tax changes that have now kicked in…
Making tax digital
Sole traders and landlords earning more than £50,000 from self-employment and property will have to use the Making Tax Digital system from 6 April.
The new system is a UK government initiative aimed at modernising the tax system by getting businesses and landlords to keep digital records and submit quarterly tax updates to HMRC using compatible software.
Under the changes, sole traders will be forced to file at least five updates to HMRC every year – four quarterly updates on their income and expenses and an end-of-year tax return.
If a self-employed person is also a landlord, that doubles the amount of financial updates needed to be filed, and doesn’t take into account VAT returns.
To start with, only qualifying people earning more than £50,000 will have to use the system. Those earning more than £30,000 – an estimated 970,000 people – will be required to use it from next April.
Free software options are available, and once income and expenses are recorded, the software generates a simple summary to send to HMRC.
Penalty points will be given for each late submission, with a £200 penalty only applied once four points are reached.
This means occasional slip-ups won’t result in immediate fines.
Inheritance tax
Changes to agricultural and business property reliefs for inheritance tax purposes have been rolled out.
A new cap of £2.5m before inheritance tax is due is in place for farmers.
For assets above this, a 50% tax relief will be applied.
The cap was originally proposed at £1m in last year’s autumn budget, but an announcement was made in late December to increase it to £2.5m after protests from farmers.
For everyone else, the inheritance tax threshold of £325,000, unchanged since 2009, has been extended until 2030.
Inheritance tax is due when you leave an estate valued above a certain threshold to your loved ones when you die.
There is no tax if your estate’s value is below the £325,000 threshold or you leave your estate to your spouse or civil partner, or an exempt charity or group.
The tax is charged at 40% on the part of the estate above the threshold.
For example, if someone’s estate is worth £400,000 when they die, £75,000 of it will be taxed at 40%, amounting to £30,000 total tax.
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Dividend tax
Dividend tax has to be paid on any income received from company shares that exceeds the £500 tax-free allowance.
It applies to payments from company profits, with rates based on your overall income tax band.
From this week, the rate has risen from 8.75% to 10.75% for basic rate taxpayers and 33.75% to 35.75% for higher rate taxpayers.
AJ Bell senior pensions and savings expert Charlene Young says the change means that basic and higher rate taxpayers face paying £390 more in tax on £20,000 worth of dividends than last tax year.
Venture Capital Trusts income tax relief cut
Upfront income tax relief for VCT investors has been cut from 30% to 20%.
VCTs are investment companies listed on the London Stock Exchange that invest in smaller, younger start-up firms believed to have big growth potential.
This change could mean up to £20,000 less in tax relief for an investor making use of their full £200,000 allowance (the maximum amount that is allowed to be invested in VCTs), according to Young.
“While the income tax relief for VCT investors will be slashed, the chancellor has also softened eligibility rules for companies, meaning more firms can apply for funding from the schemes to help them scale up,” she says.
Capital gains tax
The rate of capital gains tax that applies to business asset disposal relief and investors’ relief has risen from 14% to 18%.
This means entrepreneurs and investors will pay more tax on qualifying business sales.
CGT is a tax on the profit made when you sell, gift or dispose of an asset that has increased in value, such as shares, property or valuable personal possessions. You are taxed on the profit, not the total amount received.
You’ll pay:
24% on your gains from residential property;
32% on your gains from carried interest if you manage an investment fund;
24% on your gains from other chargeable assets.
For sole traders, business partners or those with shares in a company, there is the business asset disposal relief that reduces this tax bill.
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Working from home tax relief
People who work from home will no longer be able to claim tax relief for the extra household costs they’ve paid as a result.
Previously, you could claim tax relief if you had to work from home.
Only employer-reimbursed expenses will remain tax-free. These changes do not affect self-employed individuals.
