Need a straight answer: how much to put aside for tax?

skeen08

I just calculated that if I put the 20% into a Natwest savings account every month (5% interest per month), I'd earn an interest of nearly £2,000 at the end of 12 months. Can this be right, and am I allowed to do this?

skeen08

Okay, I think I miscalculated. Actually, it would accrue £286 interest. I still think that's pretty good!

Possetjohn

PasturesNew wrote: »

20% is more than enough. Your yearly turnover is about £30k which is well under having to pay 40% tax. So you'd have enough in there to pay your National Insurance stamp and your yearly tax return.

Start here for your National Insurance payments: http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/DG_4015904

Hi Skeen08,

Lot of good advice already! As long as you are sure HMRC will accept you as self-employed and you are registered thats OK!

Pastures new gives you a good link for NI. Follow it through and you will see you also have to pay the class 2 NI (£2.30 per week 08/09 tax Year) and also class 4 NI (8% of your profit between £5435 an £40,040 then 1% on anything above £40,040).
Assuming your profits do not take you into the 40% tax band (the limit will decrease by £1200 with the chancellors latest micro adjustments!) then in you make a profit of £25,000 you need to put aside 26.73% to cover tax and NI.
Don't worry about the interest, The bank (on behalf of HRMC) will already remove 20% tax from it before you receive it! Also don't forget once you have made your first tax return as self employed with a reasonable profit, HMRC will require payments on account, which reduces the time you can earn interest on the money!
It depends how much your other work boosts your profits. Just make sure you (legally) maximise the expenses you can claim as legitimate business expenses to minimise your profit. A good accountant will help with this.

skeen08

Damn, just when I thought I had my figure. Is it 20% or 26% I should be putting aside? Literally no one has given me the same answer as the previous person, including my co-workers! *sigh*

Thank you for the help anyway.

Possetjohn

Hi Skeen08,

Strictly 20% is correct in answer to your question "how much to put aside for tax". Unfortunately there is also the class 4 NI contributions calculated on a defined range of your profit! IMO this is just another tax, which you need to provide for, hence my answer. I realise though I made a blunder as I based it on my circumstances, where all my personal allowance is allocated under pension payments. Assuming you get the standard personal allowance then for a profit of £25000 around 21.6% is about right. Remember though for every additional £1000 of profit you have to pay 28% for tax and NI up to the NI upper limit and higher tax threshold, so it is a moving target!!

I am also self employed and keep all payments and purchases on a spreadsheet which calculates profits and with a macro also calculates rolling turnover over the last 12 months (for VAT registration threshold). For someone who is computer literate, like yourself, it is quite easy to set up.

Best of Luck