Six tax changes contractors need to know about in 2018
For many contractors, the Christmas break finished as quickly as it started. A whirlwind few days of stressed-out travelling and mince pie gorging is all that your average contractor can expect before its back to work.
But the New Year period does offer some space for quiet reflection.
Many contractors will have set New Year’s Resolutions and many of these will have centred on money.
To help our customers plan their 2018 finances better, we have produced a guide to the most important tax changes and reforms that could impact your money this year.
Some of the upcoming reforms will benefit contractors and others could cost them dearly. But if you are making plans for your future it is important to know about all of them.
1. Dividend Tax allowance is being reduced
From April 6 2018, the tax-free dividend allowance will fall from £5,000 to £2,000. Although the government predicts that this change will not affect two-thirds of people who have dividend income, it will have a significant impact on limited company contractors who pay themselves primarily through dividends.
From April, if you receive income from dividends above £2,000 then the amount you earn over that will be liable to tax in line with your bracket. For basic rate taxpayers, dividend income will be subject to tax at 7.5%, for higher rate payers it will be 32.5% and for top-rate payers the figure is 38.1%.
2. Income tax personal allowance will increase
Tax changes aren’t all doom and gloom for contractors. Also in April, the Government will raise the income tax personal allowance from £11,500 to £11,850 for basic-rate taxpayers. This equates to a tax saving of £70 per year. By 2020 the personal allowance, the amount of money you can earn before paying any tax, will increase to £12,500.
Higher earning contractors will also benefit from an increase to the higher-rate threshold. This will increase from £46,350 to £45,000 – equating to a saving of around £340 per year for these taxpayers.
3. Mortgage interest tax relief will be phased out
Contractors that benefit from tax relief on mortgage interest payments on second or buy-to-let properties will see this relief curtailed again. In the past, landlords have been able to deduct 100% of the mortgage interest when calculating the taxable profit on these properties, but last April this was reduced to 75% and this April it will be reduced to 50%.
The relief will be phased out entirely by 2020, but landlords will be able to claim a 20% tax credit on their mortgage interest.
4. Your council tax may increase significantly
A 2% increase cap has been in place on all UK councils since 2012. This will be lifted this year so all councils will be able to increase council tax by 2.99%.
Furthermore, many local authorities will also be able to add an additional 3% increase to help fund social care costs, meaning that many taxpayers could face a council tax increase of up to 5.99%.
5. Tax-free gains for inheritance tax
Good news for any contractors that are dealing with inheritance tax. The amount you can receive before tax on an inherited property will increase from £100,000 to £125,000 per person in April 2018. This equates to £450,000 of tax-free inheritance for an individual and £900,000 for a couple.
But this increase on the ‘main residence nil-rate band’ will only apply to direct descendants including children and their spouses, grandchildren and their spouses, step-children and foster children. Siblings, nieces, nephews and cousins will not benefit.
6. Capital gains tax threshold will rise
Capital gains tax is paid when an asset that you sell has increased in value. This year, the amount of tax-free profit that you can make will increase from £11,300 to £11,700 – an increase of £400 before any tax is payable.
Married couples and civil partners can use their partners’ annual exempt amounts meaning a combined tax-free total of £23,400.
For more information about any of these changes and how best to respond to them, speak to a member of our accountancy team today. Call: 0800 121 6513.