40% Tax rate when employed and self employed?

wharty · 20 November 2009 at 9:58PM

Hi

I am soon to be starting a business where i predict my earnings from the business will be at least 9k per year as a sole trader.
In my Full-time job i earn about 31k. I believe the 40% tax rate kicks in at 37,500. So in total my earnings would be 40k per year.

My questions are

1)Will i only have to pay 40%tax on the amount over the threshold so the 2.5k or the whole lot?

2)I was also told on here as a sole trader i would be taxed on my business earnings at 22% irrespective of wheather or not i spend it (what i mean is i planed on saving it up for a few years and not spending it) so i was wondering if i could pay my wife on my books before the tax is taken to bring my threshold back down from 40%

I really hope that makes sense and would be very greatful for any kind of help

Thanks

ukbill69 · 20 November 2009 at 11:31PM

Register as ltd company, get the 5k tax free, take rest as dividend and pay I think 21%

Savvy_Sue · 20 November 2009 at 11:52PM

Don't register as a limited company without looking into the obligations and restrictions which come with it!

AFAIK the answers to your questions are:

1. You only pay 40% tax on your income over the higher rate threshold, and don't forget you can take off your self-employed expenses to bring your total income down.

2. I'm not quite sure what you mean by the first part of this question, but if your wife is employed in the business then by all means pay her. I think paying her for notional work is NOT on, however.

karen_newcastle · 21 November 2009 at 2:26PM

As others have said you will pay 40% on anything you earn over the higher rate threashold. But remember to deduct all your expenses from your self employed income.

And yes you will pay 22% of your self employed income regardless of what you do with it! Remember though if you pay youre wife you become her employer so will have to register as such and pay her the correct tax and NI etc.

fengirl_2 · 21 November 2009 at 3:02PM

The basic rate of tax is 20%, not 22%. Although your total income will be £40k, you have tax free allowances to deduct of 6475, so I dont think you will be a higher rate taxpayer this year. Also, dont forget that you are starting your business part way through the tax year, so the profit assessable in this tax year will maybe only be half of the £9k. You can employ your wife of couorse, provided she is actually working in the business and you are paying her the going rate for the job.
I wouldnt recommend a limited company unless you are really earning megabucks or are employing people. Its all very well accruing the profits in the company, but you still have to pay tax o it when you come to withdraw it.

fawd1 · 21 November 2009 at 3:48PM

I would have to disagree. I think that registering as a ltd company is absolutely the way to go. Although, yes, it does mean more paperwork and more hassle for you, it also means, more importantly, that you are exempt personally from the company finances i.e, if the worst were to happen and the company were to go under, you wouldn't be left with a whole load of debts to your name. Also, there's the option of a public or a private limited company. No point in going public, as that is a whole load of hassle and means that technically anyone could buy a percentage if not all of your shares, and you would have to float the company on the stock exchange. But, if you were4 to become a private limited company, then you could make yourself and your wife joint directors, thereby being able to pay her a wage, or dividends, which would mean you'd pay less tax. Plus, like I said previously, it means that the company debts will never fall on to you.

paulwf · 21 November 2009 at 7:25PM

Having limited liability for debts doesn't offset the complexity and cost of being limited in all cases. Firstly many businesses wouldn't end up significantly in debt if they failed (especially if there aren't wages to pay out or premises to lease) and secondly most liabilities have to be personally underwritten.

I would advise discussing the situation with an accountant. Perhaps the best option would be to start off as a sole trader then review it at the end of the tax year. It is easier to go from sole to limited rather than the other way, plus in the first year net profits are likely to be low so it won't matter that much which option you choose.

If it turns out you will end up paying 40% in tax personally I would look to put as much on expenses as possible. Of course you don't want to waste money but I can't see the point cutting corners and running the company on a shoestring when you only get 60% back when you could be making working life comfortable for yourself.

fengirl_2 · 21 November 2009 at 10:23PM

My goodness, what a lot of hassle people want to put you through for an income of £40k a year! Paul suggests you put as much through expenses as possible - you need to put legitimate business expenses through the business or yoou are in trouble. But in any case, whatever you spend on the business only reduces the tax - you have to spend it in the first place!

40% Tax rate when employed and self employed?

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