Tax is just like the dodgems at the fair

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income tax

TAX

Tax is just like the dodgems at the fair, you swerve to avoid one and slap straight into another. This series may help you to understand how taxes work.

Income tax is payable by everyone earning a revenue income; that is other than income from the disposal of capital.

If you are self employed then you will have to pay tax on your profits, not what you take out of your business. Currently the first £11,000 of profit is taxed at zero, the next £32,000 is taxed at 20%, from there to £150,000 the rate is 40% after that it’s 45%. Note that it works in blocks so that only the slice between those figures is taxed at the rate shown. So someone on say £48,000 pays, zero on £11,000, £6,400 on £32,000 and £2,000 on the remaining £5,000.You also have to pay class 4 National Insurance Contributions. For those of you new to self employment you may remember that you had NIC deducted from your salary and that your employer had to add his element to it when paying HM Revenue & Customs. Class 2 NIC (being withdrawn) is the employees’ element and class 4 is the employers’ because you employ yourself.

HM Revenue & Customs may try to say that you are earning from your hobby, and not from a proper commercial enterprise. If it is a hobby then you cannot claim the various reliefs against the tax due such as the use of your home as an office which allows you to claim £350. Note this does not put you at risk of Capital Gains Tax when you sell your home. Travel to your work is claimable, and there are allowances on your vehicle, tools, equipment, and in some cases food and accommodation if away from home. Did you know that you can claim an allowance for using your bicycle?

If you earn from letting property then your allowances will change next year. You will not be able to claim the current 10% wear and tear allowance, and your mortgage interest relief will be reduced by 25% in each year after 5th April 2017. The relief will be replaced by a tax credit, but only at the 20% rate, so higher rate earners beware. Those of you still in employment but with an extra income may be able to create a loss from this second income which can be used to give sideways relief against tax already taken from your salary.

Sharing your home with a paying guest, known as Rent–A –Room, is now more advantageous as the tax free limit has been raised from £4,250 to £7,500.

In future articles I will examine the other taxes, and go into greater depth, but without trying to turn you into accountants. Of course you should ask yourself, if you’re not in business for fun or profit why are you doing it?

Remember also the motto of HM Revenue & Customs – “Taking your money, because we can.”

Eric Moss-Wright
Partner
Wright, Lilley & Co.