“In the new tax year freelancers are having to deal with the most wide-ranging changes in personal income taxation for more than a decade, says Daniel Fallows, director of accountancy Gorilla.
“We have to go back as far as 2011 since the last time both the Primary Threshold and the Upper Earnings Limit of National Insurance were increased and this year these increases have been combined with the first rise in dividend tax rates for six years.
“However, unlike the increases in National Insurance and dividends in 2011 and 2016 respectively, the most wide-ranging change in personal income taxation affects the public during a cost-of-living crisis with inflation reaching its highest level for 30 years,” he says.
As previously reported by The Freelance Informer, more freelancers are going to be pulled into paying higher rates of income tax thanks to fiscal drag. In March 2021, the Chancellor announced that personal allowances and income tax thresholds will be frozen until 2026.
“This is going to result in around 1.2 million additional workers being brought into the 40% tax threshold – this stealth tax increase, known as fiscal drag, will rake in an additional £10.9bn for The Treasury,” says Fallows.
How to make tax year resolutions
Due to the triple whammy of fiscal drag, the cost-of-living crisis and the widest-ranging increases in personal income taxation for more than a decade, Fallows says the accountancy is advising freelancers to make new tax year resolutions to help them to be more disciplined with their finances.
- Keeping a digital tracker of your pay and other income to know how much disposable income you have
- Keep a digital tracker of regular outgoings so you can plan how much money you have for essentials first then leisure activities each month or week. Set a budget.
- Embrace making tax digital now rather than later so that you can be more disciplined in budgeting when filing tax liabilities.
This upcoming tax year could be one of the most difficult for freelancers to face, which is why preparation and discipline is advised so you can have money set aside for tax bills. Freelancers that have joined umbrella companies are feeling the financial pinch and not always feeling the love from their “new employer” – their umbrella.
According to a previous FI report, 60% of contractors reported their income had been reduced due to the change in IR35 legislation. The overwhelming majority (74%) felt the system benefited neither the hiring business or the contractor, with just 4% saying they would keep the regulations as they currently stand, according to research conducted by Caunce O’Hara.
Setting up a dedicated “tax account” with a standing order of the amount of tax you should be setting aside based on your monthly incomings could help. Once the money has been set aside it’s not there to spend. For those that are under a PAYE system, you may have to see how much you still need to set aside if you are still running a limited company or paying for yearly accountancy bills.