Self Employed - Managing Income

[SS9]

Background - My wife is Self Employed with a reasonable income and we manage her Self Assessment each year ourselves. Up until this year this has been a reasonably straight forward affair as she's had very little if any tax to pay and therefore the money she earns is largely the money she keeps/invests. This year (21/22) is slightly different in that she's moved into the Higher Tax band and therefore needs to plan for a more complicated/expensive Self Assessment in January 2023.

- The first problem we're seeing is that she has no 'pre-payments' with HMRC built up, so when she does her self assessment in Jan 2023 she'll be paying her tax bill for 21/22 plus will have to pay an additional 50% as pre payment for 22/23 and the same again in July 2023. This means that throughout the year 21/22 we're aiming to put away double the amount of tax (and class 4 NI) she typically would to ensure she can cover this bill. Does this sound right? I appreciate HMRC like payment in advance of earnings but this seems pretty challenging when going from 'non tax payer' to 'higher rate' status.

- The second problem/question - does anyone have experience/methods for managing this in a way that is relatively simple and straightforward? At the moment we're managing all this through complicated Excel spreadsheets, taking each months income and projecting it forward for the year to work out tax/student loan/NI costs and ensuring that money is put aside. What makes this slightly more complicated is her monthly pay check varies significantly which alters her projections a lot in the early part of the year. If she had a fixed income each month this would be far easier I suspect.

Ideally - we'd have a system where she just puts X% away each month and that's guaranteed to cover things, but with tax bands etc I don't believe it's that simple!

(I know someone is going to suggest we pay an accountant - that's possibly our next step if we don't find an answer through PH )

[trickywoo]

You can do the self assessment for 21/22 on 6th April 2022 so you will know how much needs to be paid well before the absolute deadline of January 2023.

There are also quite a few online tax calculators where you put your details in and it gives you a calculation. I use listentotaxman and itcontractor.

If you don’t think the following year tax liability will exceed £1000 you can request not to pay the 50% ‘on account’ amount for the current return. There is a section in the online return for this specifically.

You can also ask HMRC to collect the tax due via the PAYE so an amount comes out monthly rather than in lump sums.

Fundamentally though if you don’t know how much you are going to earn it’s not easy to plan but if your earnings go into the higher rate it’s sensible to put aside at least 50% of any additional income to cover future tax liability.

[SS9]

trickywoo said:

You can do the self assessment for 21/22 on 6th April 2022 so you will know how much needs to be paid well before the absolute deadline of January 2023.

I hadn't actually realised this - that's a mega useful tip thank you. That gives us an early warning on whether our calcs are right and time to fix it if not.

It's the variable monthly income that is making this difficult I think. Beyond doing an average projection each month I can't think of a better way of doing this whilst avoiding surprise tax bills. I think this period has also been made more tricky because of the pre-payments we need to plan for given the move to higher rate.

[AndyAudi]

SS9 said:

- The first problem we're seeing is that she has no 'pre-payments' with HMRC built up, so when she does her self assessment in Jan 2023 she'll be paying her tax bill for 21/22 plus will have to pay an additional 50% as pre payment for 22/23 and the same again in July 2023. This means that throughout the year 21/22 we're aiming to put away double the amount of tax (and class 4 NI) she typically would to ensure she can cover this bill. Does this sound right? I appreciate HMRC like payment in advance of earnings but this seems pretty challenging when going from 'non tax payer' to 'higher rate' status.

I think below is right if someone more knowledgeable would like to confirm

I think you may be looking at this a little off, stop considering it as prepayments & paying HMRC in advance of earnings - I don’t think you are. (You may be paying in advance of having the correct amount calculated.)

Jan-22 deadline this year is when you have to have submitted the tax return for year ended April 2021.

At this time you should have paid all the tax for that period, either by earlier payments or with a balancing payment on 31st Jan.
The 50% payment on account you are being asked to pay in Jan-22 relates to the year ended April-22 (which you are already through more than 50% way through)

The 50% payment on account by 31st July 22 also relates to year ended April-22.

The above should demonstrate that you’re not paying anything in advance.

The good news is if you’re managing to track things you will possibly know by July what the liability should be & if it’s less than the estimate I think you could apply to get the payment reduced to correct level .

[Eric Mc]

SS9 said:

I hadn't actually realised this - that's a mega useful tip thank you. That gives us an early warning on whether our calcs are right and time to fix it if not.

It's the variable monthly income that is making this difficult I think. Beyond doing an average projection each month I can't think of a better way of doing this whilst avoiding surprise tax bills. I think this period has also been made more tricky because of the pre-payments we need to plan for given the move to higher rate.

You need to do a bit of homework on on how the self employed are actually taxed under the UK tax system - i. e. the bases of assessment etc and how that feeds into the Payments on Account system.

Perhaps you should talk to an accountant. We do tend to know and understand this stuff.

[Tyre Smoke]

Eric is right.

Stop penny pinching and get an accountant. They should save you far more than they cost.

How do you value your time? How many hours do you spend on this? Speak to an accountant and they'll do it all for you. Actually speak to several and go with the one you like best.

[SS9]

AndyAudi said:

I think below is right if someone more knowledgeable would like to confirm

I think you may be looking at this a little off, stop considering it as prepayments & paying HMRC in advance of earnings - I don’t think you are. (You may be paying in advance of having the correct amount calculated.)

This explanation has cleared things up for me massively, thank you. You're right that I've been trying to put away twice the tax in 21/22 to allow for pre payments for 22/23, forgetting that by the time I do the submission for 22/23 the money has already been earned (and therefore tax put aside).

Eric Mc said:

Perhaps you should talk to an accountant. We do tend to know and understand this stuff.

Tyre Smoke said:

Stop penny pinching and get an accountant. They should save you far more than they cost.

Thanks both. We've not done this previously because her earnings were so low and we felt an accountant would be taking too big a cut. For the past 6+ years we've been managing ok without any surprise bills/letters. Now that she's earning a lot more, an accountant may be the right move. Out of interest - what sort of ballpark figure would an accountant want to support a self employed persons accounts?

[Tyre Smoke]

Depends where you are, but I would think a sole trader simple set of accounts and tax return £250-350 a year?

Eric might well be able to give a better indication since he is an accountant, but has to be careful of touting for business.

[Countdown]

SS9 said:

Out of interest - what sort of ballpark figure would an accountant want to support a self employed persons accounts?

Unfortunately it's a bit like asking how long is a piece of string - it all depends on how complex your finances are and how much you do yourself

These guys say they will do it for £99

£24.50 a month

[Eric Mc]

I don't tout for business - as I don't really want or need any more clients. For a person with mainly salaried income, some self employed income and maybe some investment income, I would not pay more than £200 to £300 per annum to an accountant - unless there were some other complexities involved.

[Tyre Smoke]

Sorry Eric, wasn't inferring you would tout for business. I thought there was some rule about accounts quoting for work. My sincere apologies.

[Eric Mc]

I wasn't having a go at you either I was just stating that I don't really look for work on PH - although I have picked up the odd (very odd) client from chatting to PHers.

There isn't any professional restriction on advertising (or touting) for business. There used to be but they were dropped in the mid 1980s - an era when commercial imperatives began to be looked on as more important than professional ethics.