Consultancy work and PAYE

GPKett

HI,

I work as an IT Manager and the company i work for is closing down in March and im being made redundant. I will (hopefully) find a new role with a new company and will be on PAYE.
My current boss would like me to do some consultancy work for him as well. It will be a few hours a week and i would think i would be getting £800 - £1000 a month for at least 6 months. He wants me to send him an invoice each month for the work.

Whats the best way for me to do this. Doing some research on line it looks like either sole trader or limited company? I already fill in a tax return due to child benefit and higher rate pension relief.

How do i work out how much Tax etc i will pay.I want to get cost correct so that when i have paid all the tax etc it is actually worth my while.

thanks

(Removed by Forum Team)

Bookworm105

do not set up a Ltd company for such a small amount of income for a temporary period, it will cost much more than  submitting a tax return as self employed "sole trader" 

lots of info on what to do is easily accessible to an IT consultant  
have this as your free gift: Set up as a sole trader: step by step - GOV.UK


Of course you then include that income on your tax return you are already required to submit.
How much tax you pay depends on whether you will still be a higher rate tax payer for that tax year, judge that for yourself. 20% or 40% 
With 6 x £1,000 pm SE income it is unlikely you will incur National Insurance on your profits, but as you will have a gap in employment, do consider if you should voluntarily pay Class 2 NI to keep your state pension entitlement for that year 

GPKett

Hi,

thanks for this. so the sole trader amount is added to the PAYE amount and the total is then taxed. so as the total amount is over the higher tax bracket threshold (and so is the PAYE amount) then in effect i would pay 40% on the sole trader amount?

thanks

Bookworm105

GPKett said:

Hi,

thanks for this. so the sole trader amount is added to the PAYE amount and the total is then taxed. so as the total amount is over the higher tax bracket threshold (and so is the PAYE amount) then in effect i would pay 40% on the sole trader amount?

thanks

yes of course 
income tax builds up a single pot which at certain points crosses thresholds at which the amount above that threshold gets taxed at the rate applicable to that threshold

there is a specific order set in law by which the pot is added up so that various allowances are applied at the correct point: 
1. "earned income" whether from employment and/or self employment (profit) is just one (combined) total and starts the process 
2. then add "unearned" income from interest on savings 
3. then add "unearned" income from dividends (this is called the "top slice" of income as it is always going to be subject to your highest rate of tax )

1+2+3 = total pot

in simple terms, if employment + SE profit is > £50,270 then you are going to pay 40% tax on the amount over 50,270
I'm sure you can look up tax bands yourself, but this may help you
Do you understand how income tax works? | Low Incomes Tax Reform Group

penners324

Probably worth opening a sole trader bank account. Starling & Monzo offer free ones, plus they have pots that will take a certain amount to one side, so you have the tax already saved.

prowla

Bookworm105 said:

do not set up a Ltd company for such a small amount of income for a temporary period, it will cost much more than  submitting a tax return as self employed "sole trader" 

lots of info on what to do is easily accessible to an IT consultant  
have this as your free gift: Set up as a sole trader: step by step - GOV.UK


Of course you then include that income on your tax return you are already required to submit.
How much tax you pay depends on whether you will still be a higher rate tax payer for that tax year, judge that for yourself. 20% or 40% 
With 6 x £1,000 pm SE income it is unlikely you will incur National Insurance on your profits, but as you will have a gap in employment, do consider if you should voluntarily pay Class 2 NI to keep your state pension entitlement for that year 

Why would it cost more?

DullGreyGuy

prowla said:

Bookworm105 said:

do not set up a Ltd company for such a small amount of income for a temporary period, it will cost much more than  submitting a tax return as self employed "sole trader" 

lots of info on what to do is easily accessible to an IT consultant  
have this as your free gift: Set up as a sole trader: step by step - GOV.UK


Of course you then include that income on your tax return you are already required to submit.
How much tax you pay depends on whether you will still be a higher rate tax payer for that tax year, judge that for yourself. 20% or 40% 
With 6 x £1,000 pm SE income it is unlikely you will incur National Insurance on your profits, but as you will have a gap in employment, do consider if you should voluntarily pay Class 2 NI to keep your state pension entitlement for that year 

Why would it cost more?

It will cost more because you've your registration fee and your annual confirmation statement filing fee but these arent significant amounts. It also exposes you to additional fines for late filing, which may be more of a risk initially if you dont know about things like the annual confirmation statement etc.

Maybe there is a question of if the OP would be able to complete the company forms themselves without the aid of an accountant as unlike self assessment they are not intentionally designed for Joe Public to complete. I mean its not that difficult to do it yourself but the majority of business owners I know dont do it themselves so add on the accountants fees and it does then start looking notably more expensive. 

Bookworm105

prowla said:

Bookworm105 said:

do not set up a Ltd company for such a small amount of income for a temporary period, it will cost much more than  submitting a tax return as self employed "sole trader" 

lots of info on what to do is easily accessible to an IT consultant  
have this as your free gift: Set up as a sole trader: step by step - GOV.UK


Of course you then include that income on your tax return you are already required to submit.
How much tax you pay depends on whether you will still be a higher rate tax payer for that tax year, judge that for yourself. 20% or 40% 
With 6 x £1,000 pm SE income it is unlikely you will incur National Insurance on your profits, but as you will have a gap in employment, do consider if you should voluntarily pay Class 2 NI to keep your state pension entitlement for that year 

Why would it cost more?

the prime reason for being Ltd is because of the tax advantages when accessing the profits of the work done

BUT because you appear to only have a short gap between being an employee you will have gross income of at least £12,570 in the tax year and so never be at the point where the additional costs of setting up and running a company will cover the tax saving. Unless you have sufficient knowledge of accountancy can you avoid an accountant's cost by preparing Ltd Co accounts in accordance with legal accounting standards?

prowla

DullGreyGuy said:

prowla said:

Bookworm105 said:

do not set up a Ltd company for such a small amount of income for a temporary period, it will cost much more than  submitting a tax return as self employed "sole trader" 

lots of info on what to do is easily accessible to an IT consultant  
have this as your free gift: Set up as a sole trader: step by step - GOV.UK


Of course you then include that income on your tax return you are already required to submit.
How much tax you pay depends on whether you will still be a higher rate tax payer for that tax year, judge that for yourself. 20% or 40% 
With 6 x £1,000 pm SE income it is unlikely you will incur National Insurance on your profits, but as you will have a gap in employment, do consider if you should voluntarily pay Class 2 NI to keep your state pension entitlement for that year 

Why would it cost more?

It will cost more because you've your registration fee and your annual confirmation statement filing fee but these arent significant amounts. It also exposes you to additional fines for late filing, which may be more of a risk initially if you dont know about things like the annual confirmation statement etc.

Maybe there is a question of if the OP would be able to complete the company forms themselves without the aid of an accountant as unlike self assessment they are not intentionally designed for Joe Public to complete. I mean its not that difficult to do it yourself but the majority of business owners I know dont do it themselves so add on the accountants fees and it does then start looking notably more expensive. 

Well - registering a company and submitting the annual confirmation statement come to around £100, which doesn't really qualify as much more.

I'm not sure that factoring in fines

Bookworm105 said:

prowla said:

Bookworm105 said:

do not set up a Ltd company for such a small amount of income for a temporary period, it will cost much more than  submitting a tax return as self employed "sole trader" 

lots of info on what to do is easily accessible to an IT consultant  
have this as your free gift: Set up as a sole trader: step by step - GOV.UK


Of course you then include that income on your tax return you are already required to submit.
How much tax you pay depends on whether you will still be a higher rate tax payer for that tax year, judge that for yourself. 20% or 40% 
With 6 x £1,000 pm SE income it is unlikely you will incur National Insurance on your profits, but as you will have a gap in employment, do consider if you should voluntarily pay Class 2 NI to keep your state pension entitlement for that year 

Why would it cost more?

the prime reason for being Ltd is because of the tax advantages when accessing the profits of the work done

BUT because you appear to only have a short gap between being an employee you will have gross income of at least £12,570 in the tax year and so never be at the point where the additional costs of setting up and running a company will cover the tax saving. Unless you have sufficient knowledge of accountancy can you avoid an accountant's cost by preparing Ltd Co accounts in accordance with legal accounting standards?

That very much depends upon your method of taking payment and the small business entity accounts are just a matter of filling in boxes on a form where most items are zero.

Of course, you do still have to put in some time and effort, but you can do it for beer money.

Bookworm105

prowla said:

That very much depends upon your method of taking payment and the small business entity accounts are just a matter of filling in boxes on a form where most items are zero.

Of course, you do still have to put in some time and effort, but you can do it for beer money.

no, it depends on whether OP is a taxpayer in the tax years spanning his 6 months between old and new PAYE jobs

being able to understand how to produce a balance sheet is a tad more than filling in boxes