Expenses and taxable income dumb query

ElectricMud

OK, so first up, sorry for the dumb question, but the more I google the more confused I become…

So, this year (2021/22) I set up as a sole trader (only source of income) working part-time providing editorial services, so I’ve only recently crept over the tax threshold. The existing Mac I use is on its last legs, so I have a totally legit reason to buy an all-singing & dancing MacBook as I will soon be providing design services too, and the latest InDesign software is no longer compatible with what I have (thanks, Apple.)

I know that I will need to use the traditional accounting method rather than cash basis to claim a laptop as a capital allowance, but what I can’t quite get my head around is how much my tax demand would be reduced by – ie does it come out of the tax I owe them, or my actual income?

To simplify, is it just Scenario A, or does Scenario B apply too (ignoring all other expenses and allowances, obv):

A: Tax threshold £12570

Income £13570

Taxable income £1000, @ 20% = £200

Minus expenses: Laptop £1000

Balance £12570, no tax required

 

B: Tax threshold £12570

Income £17570

Taxable income £5000, @ 20% = £1000

Minus expenses: Laptop £1000

Balance £12570, no tax required.

 

My gut feeling is it’s just Scenario A, but then surely that would mean I’m out of pocket by £800 for buying equipment that is vital to make a living?

Appreciate any replies – I’m trying to work out whether I should invest in a new laptop this year, or delay sending the rest of this year’s invoices until 22/23 so that I have a bigger pot from which to fund it if Scenario B is valid…

Dazed_and_C0nfused

It would be neither of the ways you have set out.

At best it would be an allowable expense against your business turnover so reducing your taxable profit.

It is your taxable profit which features in the type of calculations you have set out.

So spending £1,000 might save you £200 in tax (and possibly some Class 4 NI).

[Deleted User]

Scenario A. You get tax relief on your expense.
It is treated just like any other expense. 

If your turnover was £20000 and you incurred costs of £2000 you wouldn’t expect your tax to be reduced by £2000? No - you would pay tax on £18000 not £20000.

ElectricMud

"It would be neither of the ways you have set out"

Surely that is what I said in Scenario A though? But regardless, it appears I am indeed expected to pay £800 for the privilege of being self-employed (and not allowed to use it for personal reasons either) 

ElectricMud

"If your turnover was £20000 and you incurred costs of £2000 you wouldn’t expect your tax to be reduced by £2000?"

Well, actually, yes I would expect that tbh! I'm effectively having to pay £800 for a tool to make more money. Surely the whole amount should be exempt - I'm starting the year on -£800. While there's all sorts of tex exemptions for people who have to wash their work uniforms at home, etc etc. Doesn't really seem fair...

[Deleted User]

Dazed_and_C0nfused said:

It would be neither of the ways you have set out.

At best it would be an allowable expense against your business turnover so reducing your taxable profit.

It is your taxable profit which features in the type of calculations you have set out.

So spending £1,000 might save you £200 in tax (and possibly some Class 4 NI).

Yes - I know what you mean! I took the view that he worked out the tax without the expense first in scenario A and then amended it to include the additional expense.

Dazed_and_C0nfused

ElectricMud said:

"If your turnover was £20000 and you incurred costs of £2000 you wouldn’t expect your tax to be reduced by £2000?"

Well, actually, yes I would expect that tbh! I'm effectively having to pay £800 for a tool to make more money. Surely the whole amount should be exempt - I'm starting the year on -£800. While there's all sorts of tex exemptions for people who have to wash their work uniforms at home, etc etc. Doesn't really seem fair...

You are somewhat confused.  The £1,000 (or is £2,000?) is effectively exempt from tax.  By not having that £1,000 to pay tax on you are saving £200 (or £400 if a higher rate payer or £600 if a higher rate taxpayer in a niche scenario).  Plus the NI savings

Just the same as someone claiming expenses of £60 for washing their uniform will save £12 in tax.

In fact you are saving more as you can reduce your Class 4 NIC liability.  An employee claiming expenses doesn't save any NI.

[Deleted User]

The £2000 was introduced by me as an example - which has probably just confused matters! 

The point that escapes the op is that he (the business) will own the laptop (an asset) and the taxman has subsided it by reducing the tax liability  by 20 or 40% (or more for NIC).

In this case £1000 paid for a laptop for a net outlay of £800. (Ignoring NIC)

ElectricMud

[Deleted User] said:

The £2000 was introduced by me as an example - which has probably just confused matters! 

Like I needed confusing more!

ElectricMud

Dazed_and_C0nfused said:

You are somewhat confused.  The £1,000 (or is £2,000?) is effectively exempt from tax.  By not having that £1,000 to pay tax on you are saving £200 (or £400 if a higher rate payer or £600 if a higher rate taxpayer in a niche scenario).  Plus the NI savings

Just the same as someone claiming expenses of £60 for washing their uniform will save £12 in tax.

In fact you are saving more as you can reduce your Class 4 NIC liability.  An employee claiming expenses doesn't save any NI.

Hmm, yeah, I get where you are coming from. I think having come from an employed background where all of my expenses incurred for doing my job were refunded in full, it suddenly doesn't seem fair to only be reimbursed for 20% of them, plus some NICs. Especially for capital outlay on stuff that I'm not allowed / supposed to use for personal stuff.

And also, I have a bee in my bonnet about the world's richest men dodging tax, so am determined to pay nothing at all if remotely possible...

sheramber

Betting expenses from your employer means your employer is paying for the goods. He  claims the cost in his accounts and get tax relief for it. So he pays 80% of the cost.

HMRC are not your employer. You are now a business claiming relief in your accounts , the same a s you employer did.