Expenses and personal allowance question for being self employed

2108

Hi all,

Just needed help with a quick question.

I've recently become self employed and am currently paying class 2 NIC.

I understand that for this tax year there is a personal allowance of £6,475 (?) which doesnt get taxed and anything above this amount earned is taxable, however if i was to claim, say for example £1,525 as business expenses for this tax year, would the expenses be taken as part of my personal allowance or are the expenses claimed on top of the personal allowance? i.e. if my annual turnover was to be for example £15000 with a Personal Allowance of £6,475 + Expenses of £1,525 = £8000, would this mean I would be paying tax on earnings above that £8000, so out of the £15,000 the remaining £7,000 would be taxable by 20% or do expenses come under the personal allowance and not added on top?

Sorry if it's a bit confusing, thanks for any help in advance

justcrackedoff

Yo

You will get taxed on your 'profits'

ie: you sales less your expenses.

So in your example where you earn 15,000 and have expenses of 1,525 you would be liable to pay tax on 13,475.

As you have correctly worked out, each person has a tax free allowance each year.

This year (06.04.09-05.04.10) it is £6,475. Therefore you would take this from your taxable earnings to get the amount you will get taxed on. (13,475-6475) giving you £7,000 on which tax & NIC would be due.


You will also have to pay class 4 National Ins over 5715 @ 8%, so in effect the liability on your £13,475 would be:


13,475-5715 = 7,760 @ 8% = 620.8 - NIC
13,475-6475 = 7,000 @ 20% = 1,400 - PAYE

Total deductions = (620.8 + 1,400) 2,020.8.


HTH

Rolo_Tomasi

You should really seek professional advice asap. An accountant will explain how the tax system operates, will be able to provide an estimate of tax liabilities on different levels of profits, will tell you when these liabilities will become due and explain what records you are required to keep.

The most important thing to do from day one is to save towards your future tax bill. Given the figures below, the £2020.80 is due to be paid on 31 January 2011 however a payment on account of £1010.40 is also due on the same date with a further £1010.40 due on 31 July 2011.

As a rough guide, on this level of income I would recommend you transfer 20% of your earnings into a seperate account as soon as you receive them.

TM1976

In simple terms yes.

You are taxed on your profit (sales less business expenses). You get your personal allowance on top of this, so if your business makes £8,000 profit the first £6,475 of that is not taxable because it is covered by your personal allowance.

I probably don't need to say it but you only get one personal allowance per year so you can't use it against an employment as well.

2108

Sorry for the delay in getting back...

Just wanted to drop a quick note to say thanks to all of you for your help, makes things a lot more clearer to understand now Also thanks to justcrackedoff for taking the effort to register on the forums to get back to me (judging from your join date and post count)