how much for tax stamp

calmgirl

My husband has recently become self employed although the majority of work he was promised has not materialised but he has done about 3 weeks of work self employed and may do more in the future. What sort of rate of tax should we be saving on the work he has done self employed and what about national insurance? The figure of 22% has been suggested, does this seem right? Any advice would be greatly appreciated

katskorner

Well your income tax rate is likely to be around 22% alone. Then you need to add on NI - a standard rate of £2.10 a week for Class 2 contributions plus an extra 8% for Class 4 contributions on profit. So you should be looking to put aside between 30 and 35% to cover it. Remember that the IR hit you harder in the first tax period too because they ask you to pay tax in advance for the next half tax year as well as the tax already owed to them. Usually tax is payed in January and July.

calmgirl

Thanks very much

Pennywise

Calculation of tax and NIC is complicated, and it is virtually impossible to work it out correctly on an ongoing basis until each year end passes. For simplicity, I advise my smaller clients to save an extra third of whatever they draw out of the business. So if they take £100 per week drawings, they should put another £33 in a savings account (mini cash ISA is ideal) which they CANNOT touch for anything other than taxes. This is an excellent discipline to get into. If the business can only afford £100 one week, then its £75 drawings and £25 in the savings account. Never be tempted to spend the tax money. By saving this amount, you should always be covered for whatever tax bills come your way, and usually there'll be some left over for contingencies. You need to tell the Inland Revenue you have started self employment within 3 months otherwise they fine you £100.

Debt_Free_Chick

Pennywise wrote:

Calculation of tax and NIC is complicated, and it is virtually impossible to work it out correctly on an ongoing basis until each year end passes. For simplicity, I advise my smaller clients to save an extra third of whatever they draw out of the business. So if they take £100 per week drawings, they should put another £33 in a savings account (mini cash ISA is ideal) which they CANNOT touch for anything other than taxes. This is an excellent discipline to get into. If the business can only afford £100 one week, then its £75 drawings and £25 in the savings account. Never be tempted to spend the tax money. By saving this amount, you should always be covered for whatever tax bills come your way, and usually there'll be some left over for contingencies. You need to tell the Inland Revenue you have started self employment within 3 months otherwise they fine you £100.

Have you been drinking pennywise

If they take £100 out as "pay" they need to put a further £50 in a savings account. The total drawings would be £150, with 1/3rd (£50) into a "tax savings account". You need to take the amount you draw and divide it by 0.67 to find the equivalent "gross" amount. The difference between this and the amount you actually draw is the tax you need to save (if you're using the 1/3rd broad rule of thumb, which is about right).

If the total they can afford is £100, then they need to put £33 into the tax savings account and spend £67. The total £100 is the gross - multiply it by 0.33 to find the amount you need to save for tax and the rest is "net".

Pennywise

Debt_Free_Chick wrote:

Have you been drinking pennywise

If they take £100 out as "pay" they need to put a further £50 in a savings account. The total drawings would be £150, with 1/3rd (£50) into a "tax savings account". You need to take the amount you draw and divide it by 0.67 to find the equivalent "gross" amount. The difference between this and the amount you actually draw is the tax you need to save (if you're using the 1/3rd broad rule of thumb, which is about right).

If the total they can afford is £100, then they need to put £33 into the tax savings account and spend £67. The total £100 is the gross - multiply it by 0.33 to find the amount you need to save for tax and the rest is "net".

Please re-read the reply -I said an extra third of whatever they take. I then went on to suggest that if they "took" £100, they should put another third i.e. £33 into a savings account - that is certainly not "drawing it" - it is saving it! I was trying to be helpful, but you are trying to score points - heaven knows why!. The actual combined tax and NIC for a typical small business amount to roughly 25% (after considering the annual tax and NIC free exemptions). So by putting aside 1/3 of what you actually "take" for yourself, it is 25% of what is actually withdrawn from the business (including ultimate tax and NIC payments out). If they can only afford £100, then it should be £75 drawn out and £25 put into the savings account.

WHA

Debt_Free_Chick wrote:

If the total they can afford is £100, then they need to put £33 into the tax savings account and spend £67.

I would say that saving £33 and taking £67 - i.e. a total withdrawal of £100 is far too much and would agree with Pennywise's figures.

For an illustration which I use with our firm's clients, based on an average income/profit of £25,000 per year, the total tax and NIC amounts to 24% of the total profit or £6,000 p.a. leaving £19,000 to spend personally if necessary. The £6,000 is 31.5% of the £19,000 drawn or 24% of the total profit. So roughly speaking if you take £19,000 to spend personally, you do need to keep 1/3, i.e. £6333 aside (either in the business or withdrawn to a savings account) to cover the future cost.

As profits rise above £25,000 p.a., then you need to keep more aside, but if profits are less than £25,000 p.a. you need to keep aside less. If profits are under £5,000, there is virtually no tax and NIC at all.

Debt_Free_Chick

Pennywise wrote:

Please re-read the reply -I said an extra third of whatever they take. I then went on to suggest that if they "took" £100, they should put another third i.e. £33 into a savings account - that is certainly not "drawing it" - it is saving it! I was trying to be helpful, but you are trying to score points - heaven knows why!. The actual combined tax and NIC for a typical small business amount to roughly 25% (after considering the annual tax and NIC free exemptions). So by putting aside 1/3 of what you actually "take" for yourself, it is 25% of what is actually withdrawn from the business (including ultimate tax and NIC payments out). If they can only afford £100, then it should be £75 drawn out and £25 put into the savings account.

Sorry you were offended - certainly not trying to score any points (I didn't know there was a league table) but merely trying to clarify the position for the OP and others who might read your reply.

I then went on to suggest that if they "took" £100, they should put another third i.e. £33 into a savings account - that is certainly not "drawing it" - it is saving it!

But to HMRC, the total amount that the sole trader has drawn from the business is £133. HMRC class that as gross income of £133. Using your broad rule of thumb to "save" 1/3rd means that the approximate tax due on that drawing is £44.33 (1/3rd of £133) - yet they only have £33 in their savings account.

The actual combined tax and NIC for a typical small business amount to roughly 25% (after considering the annual tax and NIC free exemptions).

Might account for the confusion then.

I would simply add that, without any definition of a "small business", it's possible for a sole trader who thinks they run a small business to end up in the 40% tax bracket .... in which case they would need to put aside a little more.

Even for a 22% tax payer, saving (effectively) 25% is cutting it close. OK if the shortfall is an affordable couple of hundred, but not if it amounts to a few thousand.

Not sure why you're so upset - do you not understand emoticons? Or do you think you have a monopoly on information to share with others. In fact, I'm bloomin narked now, even though I wasn't when I first read your reply.

Have the Board to yourself - I can't be a*sed

calmgirl

thanks all of you