Newly Self Employed - Tax Advice?

Quimby

I've been self employed as a driving instructor for 6 months, and am trying to work out how much I should be putting aside for the tax bill.

I'm scrupulous with my accounts, keeping a spreadsheet showing all business income, expenses, cashflow and profit/loss at the end of each month, with all transactions taking place in my separate business account

Each month I could expect to receive approx £3k revenue, with about £1.5k business expenditure, leaving a gross profit of £1.5k

Should I take the reasonable living expenses I need from the surplus as drawings, and then calculate a percentage from the remaining surplus/deficit to put in the reserve account for the taxman? Or is it correct to take a percentage from the gross profit figure and then try to live on what's left?

I'm confused and not sure if I've put too much or not enough aside already (this tax year so far the revenue is £11.3k, with business expenses [not including any salary to me] at £8k, profit £3.3k and I've put £1k aside already for tax - does this sound reasonable?).

Also I've been trying to find out if I have a personal allowance, and if so, how much it is. I don't want to have sold myself short by keeping too much aside, ending up struggling to pay my day to day bills I'm not sure at what point I would have to pay income tax.

Sorry if it's a bit long winded, I've been PAYE all my life and never had to worry about stuff like this before, any advice is much appreciated

lincsdan86

If you have not earn anything from any other sources this tax year then you have a PA of 6035. You need to be putting aside about 30% (this is an over estimate) of your profits, as you will been to pay tax @ 20% and Ni @ 8%. Sounds alot of tax when you start to break it down. As you are earning more than the PA your should be making class 2 ni contributions aswell which is around £2.30 a week but you will need to check that.

ceeforcat

First question, and excuse me if this seems obvious, but have you registered with HMRC – if not you will already have incurred £100 penalty for exceeding the 90 day limit.

Quimby

Sorry, yes I did register before I started trading - I actually filled out a tax return for the year 2007-8 as I started the business at the end of March - I earned £60 with expenses of £180!!

I've also been working part time with my old employer, earning about £3k this year so far, and they have organised my PAYE & NI contributions for that job (I won't be working for them much more now so won't reach my personal allowance from that job)

CLAPTON

just to clarify

you need to register with HMRC within 3 months of starting
you need to pay class 2 NI by DD

your tax and class 4 NI is based on your profits ... so in your case 1,500
so if you keep 30% back of the 1,500 (i.e. £450 )... this will be an over estimate

the HMRC should send you a tax form after April 2009 and you need to actually pay the tax you owe by January 2010

Quimby

Thanks Clapton, that seems clear - I've been estimating 30% anyway, and from what you say that figure is based on the profit before I make any payments to myself from the business account to my personal account.

Hopefully if it's an over estimate I'll have a little lump sum left over once I've paid my tax bill

The_Undercover_ADI

Simplest way to do it:

Income minus business expenses = profit.

Profit = wage.

Wage minus Personal Allowance (did someone say £6k ish?) = Taxable income

If you put away 30% of your taxable income you should be ok.

Any profit above £500 a month should be considered taxable if you want to play it safe.

A word of warning though - be careful what you try to claim as business expenses - your ADI training costs are usually not claimable. If you want some real help, make an appointment with the tax office - they are usually very helpful and more importantly - free.

Quimby

Thanks Undercover - I've been looking at the Inland Revenue's guidance notes & see they're pretty clear that training costs aren't claimable, but I kind of guessed that already

As far as I can see it will be my franchise fees, petrol, advertising, pupil introduction fees, stationery etc that I can claim as expenses, as they are solely to do with the business, plus a smallish figure for mobile phone calls, use of my spare room as a part time office

I cover a large area with a lot of dead miles, plus spend quite a lot of time on the move during lessons, rather than making lots of unnecessary stops, so the mileage is pretty high - 14000 miles in the last 4 months! So petrol costs account for a significant proportion, about 20% of the income

By the way, I think it must have been your blog I left a comment on last night, re intensive instructor courses. Small world!

The_Undercover_ADI

Yep, thanks for that, it's always nice to have contributions.

Sounds like your claiming all the right things.

Bit of business advice though - try to organise your customers with as little dead time as possible - this can be a real killer for ADIs.

Make sure that your franchise is working for you - ask yourself what you could do for yourself with that money every week. I understand that many new ADIs want the backup of working with a franchise (esp a big yellow one maybe?), but remember that it is your business and if the people you employ are not working hard enough for you it can often be easier to do the job yourself and save their wages.

U-ADI.

Quimby

I must say so far I've been happy with the big yellow company - I pay an introduction fee for each pupil who books via head office, but I'm also free to source pupils for myself. I'd say about 60% of my customers have been referred this way.

The way I see it is I'm counting these fees as money I'd otherwise spend on advertising & marketing, but without the hassle of having to organise adverts, sales calls etc, leaving me free to concentrate on developing an effective teaching style and carry on learning - the day I think I know everything about teaching people to drive is the day I quit

My intention as a new ADI was always to go with a big name for a couple of years, until I had developed a reputation (hopefully a good one!) and could then look at going independent

I'm now at the stage where I'm almost able to manage my diary to the extent where I can spend 1 day in one part of town and the next in a separate part, thereby avoiding having to spend 30 minutes driving to the next lesson.

But it's the best move I made, but would suggest to anyone considering this job, go in with your eyes open, work b****y hard to qualify and don't expect to earn a fortune

The_Undercover_ADI

I'm glad the franchise is working for you.

Bear in mind that another of the big advantages of being with one of the big franchises is that you can get lots of free training. If you don't take them up on it, then your franchise fees will pay for someone else to do the courses and gain a competetive advantage over you.

Completely understand staying with while you get a handle on how the business works though.