Can you be both, and how do you deal with the tax and NI?

It’s pretty common these days for people to have more than one job.  It may be that you are starting a new business, but still need a regular income until things take off, or you want to earn a bit extra than your current employment gives you.

So how do you deal with the tax side of it all?

First of all, are you actually self-employed or just earning a bit of extra cash from a hobby.  Check out my early blog to help you decide (http://wilkinsco.co.uk/when-is-a-hobby-not-a-hobby).  If you are running a business, then read on……………………

Income Tax

Income tax is always paid on your total income for the year, so you need to add together all your sources of income and work out the tax due.

You will do this on your tax return, so as soon as you have any self-employed income you need to the let HMRC know.  They will then expect you to complete a tax return each year.

You pay tax on any income over your personal allowance (£11,500 in this tax year).  The rate is 20% on the next £33,500 of income and then 40% on income over this.  Depending on your income from your PAYE job, your self-employed profit could therefore be taxed at 20% or 40%.

For example:

Income from PAYE job                   £35,000

Profit from self-employment         £15,000

Personal allowance                         £11,500

The personal allowance is deducted from your PAYE job via your tax code, so during the year you will have tax deducted each month from your salary at 20% (on £23,500)

Your self-employment profit will be taxed at:

20% x £10,000 (£33,500-£23,500) =            £2,000

40% x £5,000                                                      £2,000

Total                                                                      £4,000

It may be that you only have a part time job and may earn less than your personal allowance.  In this case, you will be able to allocate the unused part of your personal allowance against your self-employed profit and only pay tax on the excess.

For example:

Income from PAYE job                                   £8,500

Profit from self-employment                     £15,000

In this case, you have £3,000 on personal allowance to set against your self-employment so the tax due on your self-employment will be:

20% x £12,000                                                    £2,400

What about NI?

The employed and self-employed pay different classes of NI – see my earlier blog about the NI that the self-employed pay.

The NI you pay on your employed income won’t change, and you might then pay class 2 NI and class 4 NI on your self-employed profit if it is above the relevant thresholds.

The NI due for your self-employment is now collected via your tax return at the end of the year.

What if I make a loss from my self-employment?

A new business may well make a loss in its early years.  The good news is that if your calculations show that you have made a loss, you can offset that loss against employed income, reducing the amount overall that you have to pay tax on.  You may in this instance get a refund of tax paid already via PAYE, and again you would do this via your self-assessment tax return.

For more information, please contact Rosie Forsyth.

Making the right decision as to the structure of your business can be crucial, whether it be in terms of tax savings, simplicity, perception to the outside world or future plans.

The choice is generally between setting up as a sole trader or a limited company, though other options may be partnerships or LLP’s.

This blog sets out some of the key differences between the 2 structures.  We have not covered all the differences here and have assumed for simplicity that there is no other income in the year to consider (PAYE income, rental property etc)

TAX

A sole trader will pay tax on all the profits of the business over and above their personal allowance (£11,500 in this tax year.)  Profit is then taxed at 20% up to the basic rate threshold of £45,000 and then at 40% on the next £105,000.

The sole trader also pays class 2 and class 4 NIC.  Class 2 NIC is a flat rate of £2.85 per week and class 4 NIC is calculated on the profit of the business, with 9% NIC being paid on profit between £8,164 and £45,000 and 2% on profit over £45,000.  Both types of NIC are collected via self-assessment and the tax return.

A limited company on the other hand pays corporation tax on its profit.  Corporation is currently paid at 19%.  One of the key difference though between being a sole trader and a limited company is that you have to remember that the limited company’s money is NOT your money, as it is for a sole trader – it belongs to the limited company and you have to take it out of the business for it to be “yours”.

To take the money out of the business, you either pay yourself a salary or a dividend.  This is where tax savings can be made and is one of the advantages of being a limited company.  Taking a salary out of the business is an allowable expense of the business, and therefore it reduces the profit of the company, and saves corporation tax.  Usually a limited company director will take a salary equal to their personal allowance from the company, and therefore pays no personal tax on it.

Further withdrawals from the company are then usually taken as dividends.  The dividend rules changed about a year ago, so the tax savings are not as great as they used to be, but as there is no national insurance payable on the dividend, this method of paying yourself is still more tax efficient than paying further salary.

There is no requirement for the owner to withdraw all the profit from the business and as you are only taxed personally on the amounts you withdraw, this gives you more flexibility than the sole trader if you don’t need to take all the money out of the company each year, and can lead to tax efficiencies.

To request a comparison between the tax you would pay under each structure for a given profit level, please ask!

ADMIN

The sole trader has the advantage of simplicity.  To set up as a sole trader, you need to register with HMRC and then file your tax return once a year (at the moment!)

Trading as a limited company is more complicated.  You need to register your company name with Companies House, set up a business bank account and appoint directors and shareholders.  The directors have legal duties to comply with in terms of keeping proper accounting records, filing accounts and ensuring the company complies with the relevant tax and employment law.

The company must file accounts with Companies House and these must be in a set format, and also file a corporation tax return with HMRC.  The directors will also usually need to file a personal tax return if they have received dividends from the company.  If you are paying yourself a salary, then you need to set up and operate a PAYE scheme.

You won’t therefore be surprised that accountancy costs for a limited company are going to be considerably more than for a sole trader!

LIMITED LIABILITY AND PERCEPTION

This is often a reason why start-ups go for the limited company option.  As a limited company your liability is limited to the amount of the assets owned in the company name.

For a sole trader, there is no such distinction between personal and business assets and therefore your home could be at risk.  If you operate in a high risk or litigious sector this would be an important consideration, though insurance policies can be taken out.  Limited company directors may also be asked for personal guarantees for bank loans etc.

Some people prefer to operate as limited companies as there is perception of the status being more “grown up” or being taken more seriously, and in some sectors that may be true.  Clients in some situations (especially for contractors) will only deal with limited companies so you will have no choice!

There are many other differences not covered above, but these 3 are the main considerations to take into account.  You should always take advice from an accountant when deciding which structure is best for you.  If I can help you further then please contact me.

Unfortunately it is very easy to be self employed without realising it.

You might not consider yourself to be running a business, but if you are undertaking work or selling goods with the intention of earning money there is a good chance that HMRC will consider you to be self employed.

HMRC look at the key indicators – called “Badges of Trade” to determine whether you are in fact running a business.

They are:

• Profit motive – an activity must be carried on with a view to be making a profit before it can be considered a trade. You might make losses initially but if your aim is to make money, then you could well be deemed to be running a business.
• Frequency and number of transactions – generally the more often a similar transaction is carried out, the more likely you are to be running a business. For example, making candles twice a year for your own school fete is very different to having a stall most weeks at local events.
• Modification of the asset – the more you alter something between buying and selling it, the more likely it is to be considered trading
• Nature of the asset – the type and quantity of something bought and sold is relevant. For example, I will buy a car and later sell it, but I am not a motor dealer.  However, if I bought 1000 pens and sold them on at a higher price, I am probably doing it for commercial reasons (though I do get through a lot of pens!!)
• Existence of Similar trade – transactions similar to an existing trade are more likely to be considered trading. Consider a motor mechanic buying and selling a car – he is more likely to be deemed to be in the car trade than I am.
• Sources of finance – if you have borrowed money for your “venture” – and the intention is to repay it from the money generated – then you are probably trading
• Length of ownership – the shorter time you have something before you sell it, the more likely is it that you are trading, and not just selling something on that you purchased for personal enjoyment.

HMRC would usually look at all these factors as a whole, but a single badge may indicate a business if it is significant enough.

So you do need to be careful that your “hobby” isn’t actually generating self employed income. 

If it is then you need to register with HMRC, ideally within 3 months of starting to trade.    You are then responsible for paying the right amount of tax and NI on your business which you will do via self-assessment and by completing a tax return each year.  You will have costs that you can set off against the money you earn, and if you do end up in a loss-making position, may be able to offset those losses against other income that you have, to generate a tax repayment.

For more information please contact Rosie Forsyth.

Another exciting time in the world of tax!

With the snap election and the dissolution of Parliament, outstanding bills had to be passed or scrapped before Parliament shut up shop and went on the election trail – and this process is called a Wash Up!

The Finance Bill is too important to be scrapped, so to get it passed in a hurry, lots of contentious clauses had to be dropped.

So what didn’t make the grade?

The headline area is Making Tax Digital.  I don’t expect in the long run this will mean we have seen the last of this, and it will almost certainly reappear under the new government, but for now it’s out!   It may not even mean that the timescale for introducing it gets delayed but we will have to wait a bit longer to find out.

Also out are the 2 new allowance I wrote about last week!  The £1,000 allowances for property and rental income that came in in April 17 are out again and have been scrapped!

Better news is the reduction in the dividend allowance from 18/19 from £5,000 to £2,000 has also gone.  This will please a lot of small business owners, but again it could well be reintroduced post election (depending on who gets in of course!)

Other provisions have been scrapped but the above are the most relevant to my clients.

There is a budget already planned for the Autumn and often a mini-budget post an election, so this tax hokey-cokey looks set to continue. Not great when you are trying to plan for your business or your clients!