Its tax return season and I am currently up to my eyes in “last minute.com” self –assessment returns.

Most self-employed know that (and have budgeted for) tax is due at 20% (or 40%) on their profits, but National Insurance is often forgotten about, leading to confusion over the amounts due at 31 January. The first thing to get to grips with is the fact that if you are employed, your National Insurance position is very different from that of a sole trader.

As an employee you have Class 1 NIC’s deducted from your pay.  But if you are self-employed you currently pay two classes of NICs: Class 2 and Class 4.

Class 2 NIC

Class 2 NIC’s are flat rate contributions (£2.80 per week in 2015/16).  Class 2 NI is liable to be paid for every week of self-employment in a tax year, if the profits for that tax year are greater than the Small Profits Threshold (£5,965 in 2015/16).

Class 2 NI used to be paid monthly by direct debit but is now calculated and paid via your tax return.

These contributions provide you with the opportunity to build up entitlement to the state pension and other benefit. A full state pension is paid only to those who have an adequate record of NI contributions – currently 30 years of contributions.
If your profit is under the Small Profits Threshold then you will be exempt from paying Class 2 NIC – this exemption is now automatically given when you submit your tax return.  In previous year’s you had to separately claim the exemption.

Class 4 NIC

Class 4 NIC’s are paid on the net profits that are subject to income tax and are payable at the same time as your income tax.   Class 4 contributions are payable at a rate of 9% on profits over £8,060 up to £42,385, and 2% on profits above this level.

This means that you could be paying Class 4 NIC’s but not income tax if your profit for the year is between £8,060 and £10,600.  It’s also a big number to forget about when budgeting for the amounts due at 31 January!

Class 2 is going be abolished from April 2018 to simplify things for the self employed but you should still remember to take NI into account when budgeting for your tax bill to avoid any nasty surprises!

For more information please contact Rosie at Wilkins & Co.

A few personal tax reminders this week to point you in the right direction.  Need any more help – you know where I am!

1. It’s your responsibility to complete a tax return and advise HMRC if you need to submit one – don’t wait to be asked!
2. You need to submit your return by 31 January 2020, or the penalty is automatically £100.  The penalty is not reduced or cancelled if there is no tax due.
3. Getting yourself set up to file your return takes time.  HMRC send out passwords in the post, and their postal system is worse than their phone system – so don’t leave it too late!
4. If you want any tax owed to be collected via an adjustment to your tax code then you need to submit by 30 December 2019.
5. If either you or your partner has adjusted income over £50,000, and you have been claiming Child Benefit in the year, then you need to pay this back at least in part.  You do this on your tax return, so you need to provide the details
6. If you are self employed, class 2 NIC is paid via self assessment so this will be appearing on your statement as an amount due.  If your earnings are low, then the Small Earnings exemption is now automatically applied.
7. Married couples and civil partners may be eligible for the Marriage Allowance which enables transfer of an element of the personal allowance between spouses (see previous blog.) This is widely underclaimed so check if it applies!
8. If you are a higher rate tax payer and have made charitable donations in the year, then don’t forget to add this to your return as you will get tax relief on your donation.
9. If you jointly own rental property, then this income is automatically split 50/50, unless you have declared otherwise to HMRC.  It’s not a matter of choice as to which of you declare it!
10. Tax isn’t meant to be taxing – but it is!  Just let someone else do and get your life back!  Contact Rosie Forsyth at Wilkins & Co

If you are self-employed and work at least partly from home then you are entitled to include part of the running costs of your home in your accounts.  But how much?

You have 2 options as to how to work out how much you can claim.

1. Flat Rate Method
   
   If your sales are under the VAT threshold (currently £83,000) and you are self-employed then you can use this method. You simply work out how many hours a month you spend on average running your business from home and then include a fixed amount in your accounts, as follows:

25-50 hours: £10 per month

51-100 hours: £18 per month

101 hours or more: £26 per month

The flat rate covers the running costs of your home; you can also claim a proportion of the fixed costs and your phone/broadband as per option 2.

2. Actual Costs

This method requires a little more effort, but it may give you a higher figure and therefore save you more tax.  Under this method, you need to apportion the running costs of your home on a “fair and reasonable” basis between those that are personal and those that relate to the business.

This is usually done by reference to the number of rooms you have in your house and the amount of time you use them for business.  There is no laid out formula though and therefore how you allocate costs will vary from business to business.  Keep any workings you have done so you can back up your figures to HMRC if necessary.

The costs you can actually claim can be spilt into fixed costs, running costs and phone/broadband.

Fixed Costs

Mortgage interest (not capital) or rent

Council tax

Insurance

Water rates

Running costs

Electricity

Gas

Repairs and maintenance

Cleaning
For example, assume you work from your sitting room 8 hours per day 4 days per week.  Your total fixed costs are £6,600 per year and your running costs £1,500.  You have 6 rooms in your house. A reasonable allocation of the fixed costs would be £6600 x 1/6 x 4/7 x 8/24 = £210.

An allocation of the running costs could be £1500 x 1/6 x 4/7 x 8/12 (as gas etc not used during the night) = £96

The phone and broadband is claimed on a usage basis only, so if you use your internet 50% business, 50% private you can claim 50% of the cost, including line rental.

If a property repair works solely to the area that you use for business, you can include the full cost in your accounts – for example, your office roof needs repairing.  If the repair is to the whole house – then claim in proportion as above.

So claiming costs of working from home is not as simple as it sounds.  The flat rate method will give you a quick answer, but the actual costs option may give you a higher figure.  If you need any further help then please contact Rosie Forsyth at Wilkins & Co.

Note – these rules only apply to the self-employed and not to owners of limited companies.