Help! End of tax year!

davesignum

Hi,

I’m looking for some advice regarding my tax.

I have a main 9-5 job where I earn 28k. I also do contract work on the side where I have invoiced 9k but only been paid 6k.

So at the end of this year I will have earned 34k and could get the other in my bank before the end of the year to make 37k.

I have spent 2.5k on equipment required to do the contract work but do need more so could spend another 1.5k depending on how the tax works out.

I have been paying class 2 NI contributions (quarterly) for the contract work and NI / TAX through my 9-5.

Presumably as my tax code is 503L I’m not entitled to any tax credits and have a student loan.

The way I read the I.R. documentation I will be paying 22% on any profit (not until 35k profit would I pay 40%), not sure how much NI (class 2,3,4? why an earth make it so complex?) and then some again on my “student loan” `sigh`

Now If I’ve spent 2.5K on equipment in this, my first year, 40% of that (£1000) would be deducted from my tax bill. + NI + Student loan deductions.

Given that I don’t know how much I will earn next year (could be 35 – 60k), Im trying to make a decision if to buy the remaining equipment and get my invoices paid in this year or next.

Any advice?

Much appreciated 

BTW: Is there any tax allowances for people that work over 60 hours per week? should be

WHA

First point is that it doesn't matter if your customer pays you before the end of the tax year or not. Self employed accounts work on the basis of monies "earned" not monies received. So your gross self employment income is £9k whether or not the "cash" is paid in the current tax year.

Against that you can claim all legitimate expenses. For any items of equipment purchased, you can't claim the full cost in the year of purchase, you have to claim capital allowances which spread the tax relief over several years. So far, you have spent £2.5k, so in the current tax year, you can claim tax relief of 50% (first year allowance) so you deduct £1.25k from your £9k income. Next year, you can deduct another 25% reducing balance (writing down allowance) of the remaining 50%, and then in year 3, you can deduct another 25% of the remaining 50% less 25%, and so on.

Whilst you can spend more money in the current tax year, you will only get 50% of the cost allowed against your income. It is not sensible to buy equipment for the sake of it. However, if you need equipment, and you intend to buy it in the next few months anyway, it makes sense to buy it sooner rather than later, i.e. in this tax year rather than next, to get the tax relief a year sooner.

Unless you are absolutely certain that you will be into higher rate tax next year, it is not really sensible to delay expenses "just in case".

Tax credits are absolutely nothing to do with your tax code. They are a state benefit and you have to apply separately. Unless you have minor children, at your level of income, you won't be eligible.

Class 4 NIC is 8% of profits over £5035. BUT there is an upper limit of the combined NICs you have to pay, and as you are already paying full NICs on your job, your profits may well tip you over the limit, so you need to apply for deferment of class 4 NICs so that they don't figure on your tax return - instead you would get a separate bill for the RIGHT amount of class 4 NICs a few months afterwards.

Debt_Free_Chick

One more point ..... don't muddle up your salary with your contract work. Keep all your finances for the contract work separate as you will need to prepare accounts showing your profit (or loss). To do this, you need to know exactly what's been invoiced, what your expenses were and possibly make deductions for other allowable expenses e.g. if you use your home as an office for the contract work.

Treat the contract work as a completely separate business, as you'll need to enter some precise details on to your tax return (OK - not so precise if you turnover less than ?? I think it's £15k a year). In any event, from a business point of view, you need to know what your profit is - otherwise, how do you know whether it's worth while continuing with the work?

Once you know the profit, that's the amount that's added to your salary and then the total is "sliced up" into the different tax bands. But you need to know the profit first.

HTH

davesignum

"so you need to apply for deferment of class 4 NICs"

Good tip, thanks!

"basis of monies "earned" not monies received"

That seems like a really idiotic way of organising accounts... Also annoying given that I dont want to be taxed on money that isnt actually there yet.

"buy equipment for the sake of it"

I wownt be doing that.

"Treat the contract work as a completely separate business"

Yeah Ive got that one covered. Ive kept all invoices and receipts in big book and have a seperate bank account for all payments in and out. Having said that Ive used my normal credit card a few times and then moved money across but its a seperate account.


The profit from the contract work will be: 12k
If its money in my bank then 6k

- 3000k equipment
- the cost of keeping an office in the corner of my living room (how to calculate this is beyond me).
- <insert other clever way to stop my money dissapearing>

+28k from job

Presumably I will be paying 40% on ~3k (if the upper threshold is 35k)?

I have to say that really boils my urine... Almost feels like the goverment try to hold back people making life better for themselfves.

Thanks for the advice WHA and Debt_Free_Chick.

Debt_Free_Chick

davesignum wrote: »

"basis of monies "earned" not monies received"

That seems like a really idiotic way of organising accounts... Also annoying given that I dont want to be taxed on money that isnt actually there yet.

It's a basic accounting rule. You earn money for "work in progress", even if you don't invoice it until later. The principal is that the debt (the amount you've not invoiced) is an asset of the business. In your accounts, you would show the work in progress as a line beneath your turnover, with the outstanding debt as a debtor on the balance sheet (as an asset). Both accounting convention and the taxman require you (and me!!!) to do this.

"Treat the contract work as a completely separate business"

Yeah Ive got that one covered. Ive kept all invoices and receipts in big book and have a seperate bank account for all payments in and out. Having said that Ive used my normal credit card a few times and then moved money across but its a seperate account.


The profit from the contract work will be: 12k
If its money in my bank then 6k

- 3000k equipment
- the cost of keeping an office in the corner of my living room (how to calculate this is beyond me).

It sounds like you need an accountant then. You have a choice - either swot up on what the tax allowable deductions are or pay someone who knows to do this for you. I claim £10 a week for use of my home as an office - this is not "an official rate" but a rate that my local Inspector of Taxes has not - so far - questioned. For self-assessment, it's up to you to claim what you think is "fair" but you have to be able to justify it if you are subject to investigation. Use of home as office includes heat, light, power, rates, insurance etc. In addition, I claim "actual" expenses e.g. phone & internet, (actual business use only, but I have a separate business line), postage, stationery, mileage, computer consumables, publications, professional subscriptions, laundry of professional clothing, professional fees (e.g. accountant) etc.

Presumably I will be paying 40% on ~3k (if the upper threshold is 35k)?

Your bands for income tax depend on your personal allowance and any other allowable allowances.

I have to say that really boils my urine... Almost feels like the goverment try to hold back people making life better for themselfves.

I know what you mean, but the key term here is "income tax" - essentially, the higher your income, the higher your tax bill. You need to get your taxable income down on your business, which you do by claiming the allowances you're entitled to. As I said before ... either swot up on this or pay someone who knows. If you pay an accountant, then that's an allowable deduction

Thanks for the advice WHA and Debt_Free_Chick.

You're welcome

grahamliza4

If your tax affairs are getting that complex get an accountant - a good one will save you way more than their fees.

Remember if you end up doing your SA wrong and pay over too much tax the Inland Revenue won't point this out. (Of course if you miscalculate so you underpay they'll be beating down your door!)