Moving from self employment to employment help

poppy52

I was self employed until mid July 2005. My tax year ran from January to December which meant that last year I was paying tax based on 2003 income. I stopped self employment in July and am paying the remainder of tax (£3500) owed on a debt managment plan. I started a new salaried job in September and am paying higher rate tax on this - this means that so far, from September to December I have already paid over £4000 as PAYE. I already paid some PAYE on standard rate relating to exam marking work done in the summer - this amounted to about £7000 before tax.I have always had my accounts done by an accountant, although they are very simple since I was an education consultant, no employees or anything complicated. I don't really want to pay an accountant this time round because I have lots of financial problems. The tax return due at the end of this month will relate to Jan-Dec 2004 income, which was roughly the same as the previous year. Will the PAYE I have already paid this year be taken into account or will they expect me to pay the same as I used to do, i.e. payment + payment on account in January and payment in July? Also, I have looked at the tax returns online but they seem to relate to tax years beginning in April. How do I put Jan to Dec?

roger_c

the tax returns online but they seem to relate to tax years beginning in April

Tax returns are always in relation to the tax year from 6 April to 5 April in the following year.

Any PAYE income should also be input, you should have forms p60 (relating to the year to 5 April 2005)/p45 (if you left an employment) which show all the detail needed when completing the online tax return.

You say your tax year ran from Jan-Dec, but what happens with accounts is that the end of your 'accounting period' (31 December 2004 say) falls within the tax year to 5 April 2005 and therefore this income is shown on the current (2005) tax return. You could then make a claim to reduce your payments on account (tax paid towards your 2005/06 liability) on 31 Jan 2006 and 31 Jul 2006 to account for the fact that you will have half a year's worth of self-emp income which has not already being taxed at source (like PAYE employment income, bank interest, dividends, etc). Since on your 2006 tax return you have to show roughly half a year of self-employed income (Jan-Jul) you could roughly half the payments on account.

If you get your tax return done before July next year you maybe able to get some money back / not have to pay your 31 July payment at all.

That's my tuppence worth anyway! Hope that helps.

Elaine_Wilson

When estimating your liability for 2005/06 to decide how much to reduce your payments on account don't forget to take account of your overlap relief.

This figure should have been shown on your past returns in box 3.80.

Your self employed income to be taxed in 2005/06 will be the profits for the period January to July 2005 less this overlap relief.

poppy52

Thanks Elaine. What is overlap relief?

Elaine_Wilson

poppy52 wrote:

Thanks Elaine. What is overlap relief?

Hi,

When you started your self-employment some of your earnings would have been "taxed twice".

Assuming you started on the 1st January in, lets say 1998 by way of example. Your 1998 tax return would have included your income for the three months January to 5th April 1998. As you say your accounts are prepared to 31st December each year then, in round figures, one quarter of that first year's earnings would have been taken into account (in 1997/98)

Now looking at 1998/99 the figure to be included is that for the year "ending within the year of assessment", ie the twelve months to 31st December 1998.

If I have made that clear enough then you will see that the period from 1st January to 5th April 1998 has been included in both years. This profit is your overlap profit.

Now, you have ceased your self-employment in July 2005. In 2004/05 you will have paid tax on the income for the year ended 31st December 2004. So the 2005/06 return should include the income from 1st January 2005 to the finish date. But this will mean that, over the whole period of self-employment you will have paid tax on more than you have earned. So you can now deduct the overlap profit in 2005/06 (the last year) to correct the double tax position.

If you were in business before 1997 the position is a little more complicated but this shouldn't affect you if you have a copy of your last return as this overlap profit should have been included as a brought forward and carry forward figure in the self-employment supplement.

All you have to do is to fill in the figures for the period up to the date in July you ceased the business. If you follow the form through the net income will end up in box 3.76. Now copy the figure from box 3.80 in last year's return into box 3.78 this year. Then enter this again in box 3.79 and deduct it from the net income. Have a look at the wording on last year's form and it should become clear.

Now I've committed this to print what's the betting they change the box numbers on next year's return