April is traditionally a time for change, as it signals the end of one tax year and the start of the next. We have identified 8 changes in April this year which may affect small business owners.
1. The personal allowance is increasing
The personal allowance for the 2018/19 tax year is increasing to £11,850.
2. The marriage allowance is increasing
The marriage allowance is 10% of the personal allowance, therefore an increase in the personal allowance automatically translates to an increase in the marriage allowance. This is going up to £1,185.
3. The higher rate tax threshold is increasing
The point at which taxpayers start to pay 40% tax is increasing from £45,000 to £46,350. This is especially good news for directors who can increase dividends declared. The tax on dividends for standard rate taxpayers is 7.5%. For higher rate taxpayers, it jumps up to 32.5%.
4. The National Living Wage is increasing
As highlighted in our recent blog, the National Living Wage (NLW) is increasing from the beginning of April.
5. Workplace pension contributions are increasing
Again this was covered by a recent blog. The rate at which employers and employees pay into a workplace pension increases from 6 April.
6. Directors salaries can increase
Directors tend to be paid a tax efficient salary which is driven by the lower earnings limit for National Insurance. As this limit is increasing, then the tax efficient amount can also increase. Please sit down, the numbers are mind blowing. For the 2018/19 tax year, the most efficient amount which directors can pay themselves increases from £680 p/m to £702 p/m. NB directors salary should be viewed as part of a remuneration package and there may be other factors which affect the level of salary taken.
7. The dividend allowance is reducing
From 6 April 2016, shareholders in limited companies have had a dividend allowance and paid dividend tax. The allowance for 2016/17 and 2017/18 has been £5,000. Any dividend income over this allowance is taxed at 7.5%. For the 2018/19 tax year, the dividend allowance is reducing to £2,000
8. Tax relief on buy to let mortgage interest continues to be restricted
In April 2017 the government started the slow eradication of mortgage interest relief for landlords. Under the old system landlords would pay income tax on their profits after mortgage interest had been deducted.
This is now being phased out. Last year you could only claim 75% of your mortgage tax relief, but this will fall to 50% from April this year. This means that you can only deduct 50% of any mortgage interest you have paid on buy-to-let properties from your profits when you are calculating how much income tax you owe. You will receive a 20% tax credit on the other 50% of your mortgage interest.
Again this has been covered here.
So there are the changes in April 2018. You may be affected by some of the changes, or all of the changes. The variety highlights how tax continues to get more complex, and the importance of getting advice in respect of your tax affairs, particularly if you have a business. If you need help with this, please don’t hesitate to get in touch.