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New tax year changes: IR35, NICs and personal tax
As we moved into the new 2020/21 tax year last month, a number of changes came into force, including a rise in National Insurance contribution limits and an increase to the two income thresholds used to calculate the annual allowance. The government also announced that the proposed IR35 changes are on hold until April 2021, in light of the impact of COVID-19 on UK businesses.
In this article, Nottingham chartered accountants Clayton & Brewill sets out some of these key changes and their implications for individuals and business owners.
IR35 changes on hold
The rollout of the IR35 rules to the private sector, set to come in on 6 April 2020, is now on hold for 12 months until 6 April 2021. This is to help the business community cope with the impact of coronavirus, and the government emphasises that it is a ‘deferral, not a cancellation’ of the policy.
The off-payroll rules, often called the IR35 rules, were introduced because of concern about loss of tax revenue, particularly National Insurance contributions (NICs), arising through the use of intermediaries. Intermediaries are most often a worker’s personal service company (PSC), though they can also be an individual, partnership, or unincorporated association. The government believes many off-payroll workers are wrongly classified for tax purposes and should be treated as employees.
From 6 April 2021, if you work for a large or medium client through a PSC or other intermediary, responsibility for determining employment status passes from you to your client. Further information can be found here.
But the late change may create practical problems, for instance for anyone who has already been given a Status Determination Statement (SDS). An SDS has no legal standing this year. It is up to the PSC to determine its status, and deal with tax and NICs as before. HMRC has said it won’t use any SDS already issued as evidence if there is a dispute over your employment status in the next 12 months. Clayton and Brewill can provide further advice on this matter, so please do not hesitate to get in touch.
National Insurance Contributions
Changes to National Insurance Contributions (NICs) limits and thresholds took effect from 6 April. The Treasury has claimed the ‘typical’ employee will pay around £104 less in 2020/21. Key changes include:
- For employees, payment of NICs now starts when salary tips £9,500 per annum (2020/21), rather than £8,632 (2019/20). The threshold for Class 4 NICs also mirrors this change.
- The small profits threshold for Class 2 NICs has risen from £6,365 (2019/20) to £6,475 (2020/21).
- For higher earners, employees and self-employed alike, the freezing of the upper earnings/profits limit at £50,000 gives access to a 2% contribution rate on a bigger slice of earnings.
- But for employers, there is only an inflationary increase to the secondary threshold.
- Employers now contribute when salary exceeds £8,788 pa (2020/21), rather than £8,632 (2019/20).
- Directors in family companies must take account of the cost of both employer and employee NICs.
In announcing support for the self-employed in the current crisis, the Chancellor signalled that the contribution system for the self-employed is likely to be fundamentally reformed in the medium term. Before the coronavirus crisis, there were plans to raise the NICs threshold to £12,500. What will happen now is more uncertain.
Personal tax
The Budget addressed pension issues experienced by high earners such as GPs and NHS consultants; there has been an increase to the two income thresholds used to calculate the tapered annual allowance. Tapered annual allowance is triggered when both ‘threshold’ income and ‘adjusted’ income exceed a particular level. From 6 April 2020, threshold income (broadly net income before tax, excluding pension contributions) increases from £110,000 to £200,000. Adjusted income (broadly net income plus pension accrual) increases from £150,000 to £240,000. This should take about 200,000 higher earners out of this particular tax trap.
There is also a change to the minimum tapered annual allowance; thus can now fall to a low of £4,000 rather than £10,000. However, this will only impact those with adjusted income of more than £300,000.
There were no major changes to the Inheritance Tax regime – perhaps surprising given recommendations in last year’s report by the Office of Tax Simplification. It may be that the autumn Budget brings further developments.