Tax Confusion

[Blues657]

Hello,

Im about to start a soletrader business part time.

I'm confused as to how it will work tax wise as I already employed.

My understanding is that my personal allowance is taken up by my current job so any profits I make from the business, I pay Income tax on at 20%(up to the threshold) and I will pay group 2 NI

Is this correct?

 

[Alan]

You are not confused, sounds right to me.

 

[Blues657]

do that mean that if anything i claim back that is higher than my profits will increase my work tax code?

 

[Scalloway]

If you make a loss on your self employment you can use it to reduce your PAYE tax.

 

[Blues657]

excellent thank you both very much for your help

 

[Caspar]

There's just one more thing you would have to pay unfortunately!

On top of the 20% tax for self employed net profit, and your class 2 NI. You will also be liable to Class 4 national Insurance, (which is currently 9% of net profit after deducting the first £7,755 for 2012/2013)

Example:
If you are utilising all of your tax code in your employed job.

And if your net profit comes to say £9,000.

You would currently pay 20% of this in tax at £1,800 (Unless your total income brings you into a higher rate tax band of 40%?).

You would then pay Class 4 NI, as £9,000 less £7,755 (2013/2014 free rate), leaving £1,245 x 9% at £112.05. (Note that this decreases to 2% on anything over £41,450 for self employed net profit for the 2013/2014 tax year).

Plus your monthly Class 2 NI, which goes towards your old age pension contributions.

Any income you earn in this year 2013-2014, would require a self assessment in January 2015 (if done electronically), or by 31st Oct 2014 if done manually.

Caspar

 

[MyAccountantOnline]

Hello,

Im about to start a soletrader business part time.

I'm confused as to how it will work tax wise as I already employed.

My understanding is that my personal allowance is taken up by my current job so any profits I make from the business, I pay Income tax on at 20%(up to the threshold) and I will pay group 2 NI

Is this correct?

You could always consider a company and take profits as dividends depending on your circumstances it may save you tax.

 

[Caspar]

You could always consider a company and take profits as dividends depending on your circumstances it may save you tax.

That is an option, however, you would need to think very carefully about doing this. If your turnover is going to be low, it probably wouldn't be worth while becoming a Ltd Company. As you have to submit abbreviated account to Companies House 9 months after your year end, and pay any corporation tax over by this date to HMRC. Then submit a Company tax return and Full Stat Accounts to HMRC 3 months later.

You would have to submit an annual return to Companies House and keep them updated of any changes. Depending on certain factors, you may be required to complete P11D's to HMRC too.

You also would not be able to just draw funds out of the bank as and when you wanted them, as there would have to be enough profit in there for you to declare a dividend to cover what you wanted to take out.

If you weren't doing it yourself, accountancy fees are higher due to the additional work. but you would not have to pay class 4 NI or Class 2 NI. I would therefore suggest that you consider what your turnover is going to be, before going down this route.

 

[Blues657]

I think its going to be quite low so will go with the sole trader option.


Thank you all for your help, You can see why it might be confucing for a newbie!

 

[MyAccountantOnline]

That is an option, however, you would need to think very carefully about doing this. If your turnover is going to be low, it probably wouldn't be worth while becoming a Ltd Company. As you have to submit abbreviated account to Companies House 9 months after your year end, and pay any corporation tax over by this date to HMRC. Then submit a Company tax return and Full Stat Accounts to HMRC 3 months later.

You would have to submit an annual return to Companies House and keep them updated of any changes. Depending on certain factors, you may be required to complete P11D's to HMRC too.

You also would not be able to just draw funds out of the bank as and when you wanted them, as there would have to be enough profit in there for you to declare a dividend to cover what you wanted to take out.

If you weren't doing it yourself, accountancy fees are higher due to the additional work. but you would not have to pay class 4 NI or Class 2 NI. I would therefore suggest that you consider what your turnover is going to be, before going down this route.

Fair comments...although profit not turnover is more relevant, lots of other factors too of course.

I should also add that accountancy fees aren't generally much more now for a limited company compared to a sole trade.

 

[Ash-CBO]

I have recently signed up with a new accountant for my LTD company- fees around £450 per year to look after all accounts which I think is reasonable so don't think this is an overly costly option now