Can someone help me understand my tax calculation?

icicat

Hey all,
So my situation is I work full time and pay PAYE tax on an income of just under 42k (before tax)
I did some freelance work on the side and am registered as self employed. I earnt 4851.00 in the tax year and deducted the 1000 allowance instead of claiming loss or expenses (which totalled to less than 1000) so that left a taxable turnover of 3851.00 for my freelance work.
The tax for this was calculated at 771.40 which seems like a huge amount.
In the previous tax years my Self employed turnover was around half this and I was calculated to pay something like 32 pounds! so this feels like a bit of a shock. Though again I'm not sure if they are taking my PAYE tax code and lumping it all together so charging me 40 or so percent on my self employed income?
A few things I selected on the form I may have not necessarily selected last year (as I don't think these were on the form): I selected yes for cash basis, and chose the 1000 allowance over claiming expenses and losses.
Any help or advice would be appreciated.

Dazed_and_C0nfused

What is 20% of £3851?

icicat

Ah! good point haha. Yes they're taxing me at 20%. Thanks Dazed I didn't think of that as I thought the 40% was at 37k and over. So if I earned 10k this tax year in freelance work, combined with my PAYE annual amount, anything that goes over the 50k threshold will be taxed at 40%? So 42000 +  10000 = 52000 so the 2000 will be charged at 40% providing I didn't claim expenses? Does this sound right? thanks

[Deleted User]

That is correct, so long as the 42000 is your taxable salary i.e, after pension contributions.

icicat

Ok thanks for confirming There is some expensive equipment I plan to buy which I can expense and may bring the turnover down to under 50k. Though if I do start earning 10k and over for my freelance work on the side should I stay as self-employed? Or would it work out best to register as a limited company? Which works out best for cutting tax? Is it worth getting an accountant at this stage?

[Deleted User]

You need to weigh up the additional costs of operating a limited company, the hassle of increased administration etc against any tax savings. Company taxation is not my specialism but, on that level of profits, I would not even consider it.

oldbikebloke

icicat said:

Though if I do start earning 10k and over for my freelance work on the side should I stay as self-employed? Or would it work out best to register as a limited company? Which works out best for cutting tax? Is it worth getting an accountant at this stage?

given you have a "reasonable|" income under PAYE then yes, there may be an advantage to incorporating your self employment work as a Ltd.
But you must think in terms of profit, not turnover. You have 42k gross employment income against a higher rate tax band starting at (20/21 rates) £50,000 .
As usual, posters forget that the tax band starts after your personal allowance has been "used up" so 12,500 tax free + 37,500 @ 20% = 50,000 GROSS income 

gross income is not the same as taxable income, since ,as others have mentioned, pension impacts taxable income 

your self employment is taxed on profit, not turnover, so to enter the higher rate tax bracket with a combination of employment , pension and self employment it will not be as simple as 42 + 10.

And you do understand that you only 40% on the amount above 37,500 taxable income? You do not pay 40% on "everything", you still have the 20% band 

whether the £ and time in running a Ltd make it worthwhile to shelter what may be a modest excess from 40% is simply a matter of the maths given it appears you intend to spend that extra income each year, whether it be from a Ltd or from SE

oldbikebloke

[Deleted User] said:

Typo?? £37500

yes, & corrected

[Deleted User]

oldbikebloke said:

[Deleted User] said:

Typo?? £37500

yes, & corrected

Thought so - deleted mine also.

icicat

Purdy: yeah I feel like I would probably start the limited company when I start going over the 10k mark which is possible, though right now I'd really have to do my research for the work involved.
Oldbiker: That's great man, thanks for taking the time to explain how this all works. At first my brain couldn't quite understand, though now makes perfect sense. A friend and I was talking about the 37,500 and thought they dropped it from 50000, though of course its the 12,500 tax free that we missed.
Is it still worth getting an accountant to deal with my return? If earning say slightly over 10k self employed? Could they sometimes find ways to save me money? Or in this case no different to myself filling it in? 

MX5huggy

Getting an accountant would depend on how complex the business is, for me if I was looking to spend on equipment then I would involve an an accountant. No purely on the value of the business. 

Remember you can avoid 40% tax by putting money over the threshold in a pension or by donating to charity. 

And do you have kids or live with someone with kids because they start clawing Child benefits back at 50k.