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Following on from the self employed section of the recession article, I don't follow why £35 in every £100 must be saved for tax if you are not a higher rate taxpayer.
The £35 is definitely not a reference to the higher band as the article says that even more needs to be saved for higher band tax payers.
Surely tax is at 20% for those not in the higher rate band?
Following on from the self employed section of the recession article, I don't follow why £35 in every £100 must be saved for tax if you are not a higher rate taxpayer.
I cannot see where £35 per £100 comes from unless you move into the higher tax band. It depends a bit on your personal circumstance but if your only income is self employment, for 08-09 tax year you pay 20% basic rate tax on profits less your personal allowance, Class 4 NICs of 8% on your profits between £5435 and £40400 and Class 2 NIC of £2.30 per week.
Therefore for me £28 per £100 is sufficient, unless you hit the higher tax band with taxable earnings of more than £34800.
I got the impression that holding back £35 out of £100 was an optional thing you can do simply to help you save money. It's not actually a legal requirement. It avoids a tax bill at the end of the year and it's a form of "forced saving".
Self employment tax bills aren't that straight forward unfortunately as IIRC you have 50% added in advance for next years tax return. So you pay tax liable for this year and this extra payment so saving more is always better, although I don't think it's included in these figures.
If your business has not done so well the following year you can claim a lower payment.
£10 a day challenge so far: Apr-Mar 2008/9 £4336.17
If you take £100 from your business and spend it, then you should put another £35 aside for tax. The total you take taken out is £135, the £35 being a good approximation of tax and NIC for an average earning sole trader. I don't think the article is particularly well written and doesn't show the above clearly, but I do think it's where the figures come from. It's a matter of percentages - the amount you take and spend has to be "net" of taxes to give you enough to pay the tax as well, so it needs to be grossed-up by applying the rates backwards. Certainly, if you do take £100 and put £35 of it aside for tax, then you are grossly over-saving. As it stands, the article is at best misleading and at worst wrong.
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Pls be nice to all MoneySavers. There's no such thing as a stupid question, and even if you disagree courtesy helps.
Self employment tax rules discussion
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