To have a stupid question about self employed tax?

[ihatetaxreturns]

I feel like I should know this so I'm asking in here before asking my accountant as I'm a bit embarrassed to be the age I am and not know this

I'm self employed and have been for a few years , my business is small but growing slowly year on year

For the first few years, Up til my last tax return (2022/23) I have earned a little bit below the tax paying threshold which is £12500 a year

So not paid tax, just a bit of NI

I've earned a lot more this year so I've had an actual tax bill.

I have earned £20,000 this tax year

And in this tax year I have spent £5000 on products, training courses, advertising and other related things that can be classed as expenses

So my profit is £15000 . This is £2500 over the tax threshold so as far as I'm aware I should be taxed 20% of £2500?

But according to my accountant, my tax liability amount is £1500 which is 20% of £7500

So does anyone know why I've been taxed on £7500? Will I get a rebate? Or is my accountant incorrect?

You accountant will know why as they are the ones submitting declarations. Make sure all your deductibles actually qualify. My aunt is an accountant and she often gets stray receipts for things like designer watches which the owner claims were essential for getting to a meeting on time. Not suggesting this is what happened there but it may be that some of your expenses weren't seen as business-related.

Your also paying 50% of projected tax on account for next year

Do you mean last tax year OP? 23/24 as this tax years bill isn't due until Jan 26.

This.

They're projecting that you'll earn £20k next tax year. You have to pay tax in advance (usually 50% in Jan, 50% in July), so they're accounting for the tax you owe for last year, plus you paying in advance for the next year.

I got caught out with this when my SA business overtook my PAYE job as my main earnings and I hadn't set aside the 50% to pay up front as I never realised it was a thing!

As previous posters say, you are paying in advance for next years profit. If you think you will not be earning similar you can submit a form to reduce payments on account. Yes, you need to put in all expenses as well as proportion of phone, internet, petrol etc.,

It seems mostly in the right ball park, but a little higher than I would expect. As PP have said, maybe some of your expenses were not allowable. I would go back to your accountant and ask.

My calculation:

Tax at 20% on £15k less personal allowance = £486
Class 4 NIC = £146
Class 2 NIC = £179
1st payment on account for next year = £297
Total due 31 January 2025 = £1,108

2nd POA due 31 July 2025 = £297

You don't make payments on account unless the year that is being submitted's liability is £1000 or more, so that can be discounted.

Have you transferred any of your allowance to a spouse previously? This continues until you cancel it and would lower your personal allowance to £11310.

Has your accountant confirmed that your taxable profit is £15000?
You need the SA302/tax calculation summary from them to see exactly why your liability is this amount.

Oh dear lol at the designer watch 😅😅 I can see why that wasn't allowed

Mine were 2 (relevant) training courses, insurance, license, waste removal, products

So i would hope they'd count

Yes sorry

April 2023-April 2024

This is totally something your accountant should explain though so ask them. We can only speculate what has been included. It’s not a silly question especially when you haven’t paid tax before.

Are any of the products purchased still in stock, in which case they would be deducted from the purchase costs.

Yes I would think they're still in stock (think hairdressing / nails)

But I don't really understand what you mean though sorry 😳

You are paying your accountant to answer questions like these, OP - get value for your money!

Did your accountant ask for your closing stock figure? Normally closing stock is considered an asset not a cost of sales so any closing stock would deducted from that year's costs.

The stock you still have at the end of your accounting year has value - it is an asset, to be sold later. So the cost of acquiring that unsold stock is added back.

Closing stock would only be items that are being sold to customers eg bottles of shampoo/cuticle oil etc.

It wouldn't include anything the OP was using herself/applying to customers such as gel polishes she applies or hair dyes/shampoos she uses etc. They would be consumables.

The training courses might not be allowable for tax, depends if they were improving current skills or if was something new (even if related to your current business) https://www.gov.uk/expenses-if-youre-self-employed/training-courses

You also pay half an account of the next tax year. The first year you do it is hard as you are essentially paying more than normal, but next year you’ll be paying your remaining half plus half of the next tax year so it will balance out.

As a self employed person the allowable expenses are not the same as a company reporting profits. Training for instance is a set amount per year, professional membership fees definitely can be offset but stock has different rules. Your accountant should explain and you will need to pay money in advance for the next year because rules changed to stop people paying so far in arrears