Tax Rates and Allowances 2020/21 for freelancers

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If you are running your business as a freelancer then you need to keep up with the annual changes to the tax rates and allowances. You might have an accountant deal with your finances, even if that is the case it’s still good to be aware of any changes that may impact you and your business.

So, here are the main tax rates and allowances for 2020/21 that are most relevant to freelancers, the self-employed and small businesses.

Corporation Tax

  • You have to pay 19% Corporation Tax if your profit falls below £300,000.
  • If your annual profit exceeds £300,000 then you have to also pay 19% Corporation Tax. Y
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Value Added Tax (VAT)

  • You have to register for VAT if your turnover over the past 12 months is £85,000 or more.
  • The de-registration threshold is £83,000.
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Dividend Tax

  • Dividend income of up to £2,000 is tax-free, no matter what non-dividend income they have.
  • Dividendbasicrate is 7.5%.£0 to £37,500 on taxable income over the Personal Allowance In England.
  • The dividendhigher rate is 32.5%. £37,501 to £150,000 on taxable income over the Personal Allowance In England
  • Dividend additional rate is 38.1%.Over £150,000 of taxable income.
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Income Tax – Personal Allowance

  • The personal allowance (the amount you can earn before any income becomes taxable) is £12,500.
  • Youwill not receive a tax-free personal allowance at all if you earn £125,140 or more.
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Income Tax Bands

  • The basic rate band is 20%and applies to income up to £50,270.
  • The higher rate band is 40% and applies to income from £50,271 to £150,000.
  • The upper (additional) rate band is 45% and appliesto income of £150,000 and above.
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National Insurance Contributions (NICs)

  • If you run a company (or work for one), then Class 1 NICs apply.
  • Employees’ Class 1 NICs are payable at 13.8% on salaries over £169 per week.
  • Employers’ Class 1 NICs are payable at 13.8% on earnings above £169 per week.
  • For sole traders and partnerships, you pay Class 2 and Class 4 NICs.
  • Class 2 NICs are payable at £3.05 per week and are paid by anyone earning £6,475 or more through self-employment during the tax year.
  • Class 4 NICs are paid on profits you make as a self-employed person. The Class 4 NI rate is 9% of annual profits between £8,632 and £50,000, and an additional 2% on profits above £50,000 per year.
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Pensions Savings Tax Relief

  • The annual allowance limit remains at £40,000.
  • The maximum tax-free lump sum is 25% of your pension pot.
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Capital Gains Tax

  • If you pay higher rate income tax you’ll pay28% on your gains from residential property, and20% of your gains from other chargeable assets.
  • If you pay basic rate income tax you’ll pay 18% on your gains from residential property, and 20%of your gains from other chargeable assets.
  • You’ll pay 10% if you’re a sole trader or partnership and your gains qualify forEntrepreneurs’ Relief.
  • Each individual has an annual CGT exemption of £12,500.
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Capital Allowances

  • The Annual Investment Allowance (AIA) is £200,000and has remained at this since 01/01/2016.
  • First-year allowances remain at 100%.
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More on tax advice here.

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