The new tax year begins on 6th April 2021. It’s an important moment in the self-employed and small business calendar. A new tax year brings changes to tax rates, thresholds, and allowances, but it also represents an opportunity to take stock of your previous 12 months.
If there’s anything that could’ve gone better in your previous tax year, now’s the time to plan ahead and get on top of your business finances.
Of course, before you start writing up your new tax year resolutions, you need to make sure you’re finishing this tax year strong. We talk through what you need to take care of before 5th April, and what changes you should be aware of as we head into the new tax year.
Self-employed sole traders (or partnership)
The process is slightly easier for sole traders as they will have already logged all their invoices and expenses.
As a sole trader, claiming all the business expenses you’re entitled to reduces the profits you report on your annual Self Assessment, and means you’ll pay less tax. Learn more about the expenses you can claim as a sole trader in our comprehensive article.
If you manage your accounts on a ‘cash basis’, you need to account for any invoices on the date you receive a payment and log your expenses when you actually make a payment. It’s essentially any money that's going in and out of your bank account, including any amounts for cash transactions you pay or receive.
If you do your accounting on an accrual basis (which is the case for most accountants and accounting software), you account for invoices when you issue them to the client rather than when they pay, and account for any expenses on the date of invoice from the supplier.
As soon as you’ve got all your expenses and invoices up to date in your books, you can start thinking about filing your Self Assessment Tax Return early, and saving yourself any last-minute panics next January.
Limited company directors
For limited companies, things can be a little more complicated, but no less important. For starters, you’ll need to make sure you’ve issued all your sales invoices and recorded all your business expenses in the lead up to the end of the tax year. Claiming all the business expenses you’re entitled to will reduce your company’s Corporation Tax Bill.
For users of online accounting software, you need to make sure all your transactions have been uploaded from your business bank account, and that you’ve reconciled your accounting software with all the expenses, pension contributions, salaries, and sales invoices that have been issued to your clients.
Once your records are up to date, you can make an accurate assessment of your company profits and any Corporation Tax due. You can then calculate the dividend you can pay yourself and any other shareholders.
With Crunch's online accounting software, you’ll have an at-a-glance view of the tax you owe and how much you can pay yourself.
Taking a salary - payroll deadlines and submissions
It’s usually a good idea to pay yourself a regular salary from your limited company, as salaries are an allowable business expense. If you’re taking a salary, you need to run a regular payroll and produce all the necessary payslips and submissions for HMRC, even if it’s just for you as a single director/employee.
It's important to remember to file your final Full Payment Submission (FPS) alongside your March payroll. This is an HMRC Real Time Information requirement, and there is a late penalty for filing after 5th April 2021.
You should record a payroll run for March 2021 to maximize your tax-efficient salary. If you have no other sources of income, this would usually mean paying yourself up to the relevant National Insurance threshold of £8,788 for the 2020/21 tax year. It’s worth checking the amount you’ve been paid in salary since 6th April 2020, the start of the last tax year. If you have any other sources of income, this may impact the amount you wish to take. In this instance, you should speak to an accountant or read Crunch's guide on how to work out your salary from your limited company.
Our Crunch accountancy packages come with all the support and advice needed to stay on top of your accounts, including setting up a director payroll and dividend issuing at the click of a button.
Take company dividends before 5th April 2021
If you have any dividends to issue before the new tax year, you need to issue them before 5th April 2021 and include them in your Self Assessment for 2020/21. This can also help maximize your tax-efficiency by fully utilising your personal tax-free allowances, and making the most of the HMRC tax thresholds which usually change each year.
The tax-free Dividend Allowance of £2,000 (in the 2020/21 tax year) hasn’t changed for a number of years, but annual changes to the Personal Allowance and Income Tax thresholds impact the amount of tax you’ll pay on dividends. The amount you can take as a dividend depends on how much profit your company has made (after accounting for Corporation Tax).
You can find a breakdown of how to calculate your tax-free dividends here, along with the tax you’ll need to pay on any dividends if taking them means your income goes above the Basic Rate or Higher Rate tax thresholds.
Any dividends must be paid from available company profits, and it's important to avoid taking more than you're allowed to avoid penalties and interest, as it’s treated as a Director Loan.
Crunch's limited company packages include a simple dividend function that shows you how much you have available to take, and lets you produce all the records you need for HMRC.
Don’t miss out on your tax breaks
Whether you’re a sole trader or a limited company, you should try to take advantage of all available tax breaks by 5th April or risk losing them. These include:
- Making any pension contributions (if you’re a limited company, usually it’s best to make pension contributions through your limited company)
- Making any contributions into an Individual Savings Account, which can be up to the £20,000 limit in a tax year.
Please speak to your financial advisor for more information and bespoke advice. If you don’t have an advisor, you can find more guidance on your investments and pension from financial advisory services such as Hargreaves Lansdown.
What changes will there be from 6th April 2021?
One of the biggest changes that the new tax year will bring is to off-payroll working (IR35) rules in the private sector. You’ll need to be aware of how HMRC’s new rules affect you and your business.
Here’s a breakdown of some of the other changes coming in the 2021/22 tax year:
- VAT reverse charge in the construction industry (from 1st March 2021)
- Changes to personal tax rates including National Insurance contribution thresholds and income tax allowances in the UK
- Changes to company tax rates including VAT rates and mileage allowances
- The rates and thresholds for Scottish income tax
- Higher repayment thresholds for Student Loan deductions.
If you’d like a more comprehensive breakdown of the 2021/22 tax year changes, check out our article with the highlights from the March 2021 Budget. We'd recommend bookmarking our summary of UK tax rates and thresholds to help manage your finances effectively.
Of course, the easiest way to manage your accounts and prepare for the new tax year is by hiring an accountant. If you think you’d benefit from accountancy support, Crunch offers a complete accountancy service with unlimited support for limited companies and sole traders.
About the Author
Ross Bramble is a copywriter at Crunch - an award-winning online accounting service that supports freelancers, contractors, and practically anyone who’s self-employed. For over ten years, Crunch has combined easy-to-use, online accounting software with actual human beings, so that you’re always able to access your accounts and seek the support you need.
As a Fleximize member, you can enjoy a 10% discount on Crunch limited company packages and a £5 per month discount on sole trader packages for the first year. If you're not already a Fleximize Member, sign up for free here.