From April 6th, 2020, we’ll be entering a whole new tax year – and HMRC are planning a raft of changes to existing legislation that will come with it. The amendments will affect people all across Britain, but self-employed individuals more than any others. As well as amendments to income tax, national insurance contributions (NICs) thresholds and personal allowances, the headline change is the expansion of IR35 legislation to include the private sector.
In order to ensure that you comply with the new regulations and fulfil all of your obligations to HMRC, it’s vital that you familiarise yourself with the imminent changes. This handy guide will break down each of those amendments into easy to understand chunks, making the whole process as smooth and painless as possible.
Income tax rates in 2020
HMRC plan to introduce adjustments to the entire tax system’s structure as of April next year. These will affect not only your personal tax allowance for 2019-2020, but also the rates you pay on all earnings above that threshold. While there’s no confirmation of the rates for 2020 yet, here’s a quick rundown of the last changes for taxpayers living in England, Northern Ireland and Wales to give you an idea:
| Description | 2018/19 threshold | 2019/20 threshold |
| Personal allowance | £11,850 | £12,500 |
| Employee’s and employer’s NICs are compulsory at | £8,424 | £8,632 |
| Higher tax rate applicable at | £46,350 | £50,000 |
| Class 2 NICs compulsory when profits exceed | £6,025 | £6,365 |
| Class NICs payable per week | £2.95 | £3.00 |
Scottish taxpayers
Up in Scotland, the personal tax allowance for 2019-2020 is not scheduled to change from that of 2018-2019 levels, but the rest of the tax system will undergo a few tweaks. It should be noted that these regulations do not apply to any earnings accrued from dividends or savings, but just salaried income (UK tax rates will apply to both of the above). Here’s how it will look from April onwards:
| Band name | Band allowance | Band rate |
| Starter rate | £12,501 – £14,549 | 19% |
| Basic rate | £14,550 – £24,944 | 20% |
| Intermediate rate | £24,945 – £43,430 | 21% |
| Higher rate | £43,431 – £150,000 | 41% |
| Top rate | £150,001 and above | 46% |
Welsh taxpayers
Finally, Wales will also see some changes to its tax structure. In addition to the Welsh tax code in 2020 now being prefixed with a C (for Cymru, as in Scotland the Scottish tax code in 2020 is prefixed with an S), the following rules will now apply:
| Band name | Band allowance | Band rate |
| Basic rate | £12,501 – £50,000 | 20% |
| Higher rate | £50,001 – £150,000 | 40% |
| Additional rate | £150,001 and above | 45% |
Corporation tax rates in 2020
While the Conservative government had originally pledged to drop corporation tax rates in 2020 from 19% to 18% (before announcing a further cut to 17% in March 2016), they have since performed something of a U-turn on the subject. With a general election imminent and topics such as the NHS hotly-contested issues, the Prime Minister Boris Johnson has revealed that the cut will be frozen in order to fund those important public services.
The reduction to 17% has already been enacted into law and so a further amendment will need to be made in order to keep it at 19% before the change is scheduled to come into force on April 6th, 2020. It is not yet known whether the reduction to 17% will eventually take place in any part of the UK.
IR35 contract amendments
Perhaps the biggest change to tax in 2020 is focused on the regulations governing how much tax self-employed people working through a limited company are obliged to pay. From April 2017, the government amended its IR35 regulations so that the end client on all public sector contracts became responsible for determining whether contractors with whom they worked fell within the remit of IR35 or not.
That meant that many public sector entities simply designated every contractor they worked with as “within” IR35, for fear of incurring hefty fines if they mistakenly excluded anyone. As a result, many contractors were forced to pay significantly higher sums in tax, while in worst-case scenarios, the clients simply dropped the contractors because they did not want to pay the tax, NICs, pensions contributions and other statutory benefits that such a contract involves.
From the 6th of April 2020, IR35 will be expanded to include all private sector contracts, as well. This means that according to HMRC’s own estimates, as many as 170,000 self-employed contracts will now have to pay thousands of pounds’ worth more tax every year, with their “employers” being forced to shoulder additional expenses, as well. While this represents a major boon for the Treasury, which stands to accrue an extra £3.1 billion between 2020 and 2024, it could have disastrous implications for well over a hundred thousand contractors.
What can be done?
Those concerned that they may be affected by the new regulations should first ascertain whether or not they are likely to fall within IR35 after April. The UK government offer a free tool (called Check Employment Status for Tax, or CEST) which theoretically allows contractors to determine whether they will be liable for the additional contributions. However, CEST has come under criticism from some quarters in recent years for giving unreliable results.
For those who wish to be safe rather than sorry, there is the option of joining an umbrella company as an “employee”. Listed on the company’s payroll, you’ll bypass IR35 altogether and receive all the benefits that normal employees are privy to, such as holiday pay, maternity or paternity leave, pension contributions and sick pay. You’ll also have the burden of filing your tax returns lifted from you, since the umbrella company will fill out your PAYE return and automatically deduct your contributions from your salary on your behalf.
Compare umbrella companies
Working through an umbrella company, you can retain all of the benefits of the self-employed lifestyle, such as organising your own schedule, hand-picking your own client base and negotiating the terms of all your contracts yourself.
In short, it can offer the best of both worlds – but it should be remembered that some are more professional and reputable than others.
