Newly self-employed & some tax questions?

Sammyantha

Hi there,

I have recently registered for self assessment and waiting for HRMC to send me whatever paperwork they are sending. They said this will take up to 6 weeks which means I will miss the deadline of Jan 31st to file a tax return. The lady assured me I won't need to pay a fine as this couldn't be avoided since it is technically a hold up because of them. Hoping this is the case.

I have just been told that as a sole trader i will have to pay an extra 50% tax in my second year. I've searched but cannot find anything about this on the net? The information on tax and how it's paid is beyond understanding.

My other question is to do with tax bands. I am expecting to gain from all sources £60,000 plus next year so I am wondering what rate of tax this will put me at? And is the tax rate taken AFTER your personal allowance and expenses, or before?

And another question - I've been a bit lax with reciepts for the things I've bought for my business, so i am planning on claiming practically nothing in deductions the first time I file. However next time, when I have records of everything and receipts etc, would you advise claiming for as much as possible? I work from home, and one room is dedicated to my business (not for any other use) so i understand i can claim for a portion of utilities?

Thank you in advance:beer:

Savvy_Sue

I can only comment helpfully on the first paragraph: when did you start self employment? Because unless you started before April 2011 then there'll be no fine to pay simply because you don't need to file your self assessment until 31st January FOLLOWING the end of the tax year.

It is also worth getting ahead of yourself and filing BEFORE 31st January.

If you started s/e before last April then you could be hit with a £100 fine for not notifying HMRC of this, but that's separate to any tax liability.

ceeforcat

Yes but, with the utmost respect, I would engage an accountant at least for the first year. Unfortunately the questions that you have asked would suggest that he/she is likely to save you considerably more than you could potentially miss out upon.

tyllwyd

You don't have to pay an extra 50% tax in your second year - you are thinking of payments on account.

(Warning - this is a non-technical explanation because I am not an accountant!)

If you register as self-employed now (January 2012), you will need to file your tax return for 2011-12 by 31 January 2013. At that time, you have to pay all of the tax due for 2011-12. If that is more than £1000, you will also have to pay your first payment on account for 2012-13, which is calculated by taking 50% of the tax bill for the previous year - so your first bill in January will be tax due plus 50%.

In July 2013, your next payment on account will also be 50% of the previous years tax bill. But then by the end of January 2014 you will need to file your tax return for 2012-13, and you will know the actual tax due for 2012-13 which will either be more or less than the total of your payments on account (probably more in your case!), so you will either make a balancing payment or you will be due a refund. But then you have to make your first payment on account for the next tax year and so it goes on!

Sammyantha

Thank you all

Yes I registered this month (Jan).

So tyllwyd, do you mean that effectively you have to pay half based on what they EXPECT you to earn, and not what you actually earned? Seems extremely unfair since one year it might be a lot less than another :eek:

tyllwyd

Sammyantha wrote: »

Thank you all

Yes I registered this month (Jan).

So tyllwyd, do you mean that effectively you have to pay half based on what they EXPECT you to earn, and not what you actually earned? Seems extremely unfair since one year it might be a lot less than another :eek:

It's not so bad because you can apply to reduce your payments on account if you are sure you are going to earn less for that year. And for you, it probably works in your favour, because for your first year self-employed you are only going to have worked for three months, so your bill for that year is going to be relatively low. The trick is to remember to save for your tax bill as you go along during the year!

Savvy_Sue

tyllwyd wrote: »

It's not so bad because you can apply to reduce your payments on account if you are sure you are going to earn less for that year. And for you, it probably works in your favour, because for your first year self-employed you are only going to have worked for three months, so your bill for that year is going to be relatively low. The trick is to remember to save for your tax bill as you go along during the year!

Also this puts you in a more comparable position to those of us on PAYE: we pay tax through the year rather than in one lump sum at the end, you are asked to pay half your tax for the year rather more than half way through the year, and the other half after the end of the year, so you're able to gain interest from it for a short period!

Sammyantha

But it's quite likely that i will earn vastly different amounts each year because I'm not running a shop for eg where i know exactly how much of everything i will sell. So If I only earn 10k one year how will it be possible to pay half a tax bill for an expected 60k year??:eek: Not looking forward to next year lol.

Thanks for all your help

Savvy_Sue

that's where an accountant comes in handy: you'd get advice on maximising income in the lean years and minimising tax in the better ones. Also advice on predicting which this one's going to be.

tyllwyd

Sammyantha wrote: »

But it's quite likely that i will earn vastly different amounts each year because I'm not running a shop for eg where i know exactly how much of everything i will sell. So If I only earn 10k one year how will it be possible to pay half a tax bill for an expected 60k year??:eek: Not looking forward to next year lol.

Thanks for all your help

I agree with the advice to get an accountant.

But also, remember that your payments in advance relate to the current tax year - so eg January 2012's payment in advance relates to the 2011-12 tax year, so we are already more than half way through the tax year it relates to, so if you are having a very bad year you will already be aware of it and you can apply to reduce that payment.

When you are self-employed, the most difficult thing is to remember to put aside a sensible percentage of the money that comes in to pay the tax bill that arrives later - I'm a freelance editor, so usually I get paid cheques of between £400 - £1000 a time (and I have very low expenses), and I find that putting aside 20% of each cheque cushions the blow when it comes to the tax bill (assuming I am disciplined enough to do that, of course). The amount to put aside depends a lot on how much profit you expect to make of the year.

Edited to say - I've just looked back at your first post and realised that you have asked about tax bands. As a self-employed person, income tax is payable in exactly the same bands as for someone who is employed - you work out your profit (income minus allowable expenses), that gives your income for tax purposes. National insurance is slightly different. If you think you will have an income of £60K, you should definitely see an accountant, because they may be able to give you advice on how to arrange your affairs in a tax-friendly way. You should definitely be keeping records of all your expenses and claiming for them - it will look odd to HMRC if you don't. Again, an accountant will be able to tell you what you can claim and what you can't. And you aren't a million miles away from the VAT registration threshold of £73K, so you will need to keep an eye on that so you don't get caught out. At that level of income it might be worth setting up a limited company - again, the accountant will be able to advise you.

Mikeyorks

Sammyantha wrote: »

Yes I registered this month (Jan).

The underlying question was 'when did you start self-employment'? As that determines whether you're filing for 10-11 or 11-12.

Payments on account look confusing at first sight - but pretty easy after 5 minutes study. The HMRC explanation isn't too hard to comprehend :

http://www.hmrc.gov.uk/sa/understand-statement.htm