Employed and self employed tax

[LBXXX]

Hi

I am currently employed earning 34,000 a year

I also run a business which this year which I forecast to earn (profit) £15,000-£20,000

My account has advised me to put around 10-15% of my profits aside for tax as she thinks il be able to get tax back to make up the other amount. However I’m just abit worried that will give me a nasty surprise especially with anything I earn over £50,000 will be 40% tax

Do you think I’d be better off putting 20-25% of profit away? Or would you put more?

My business has next to no financial overheads as it’s just a online clothing boutique all I pay for really is fuel, the product themselves, advertising and postage

Sorry if this is vague it’s my first year doing it

The only way putting aside 10-15% of your estimated profits would make sense is if the accountant thinks your estimated profits are significantly inflated. I would push them to explain how they have come up with this number.

If you think your estimate of profits is a good estimate, then I would be putting aside just over 20% to cover you just getting into the higher rate tax band.

What do you mean by ‘get tax back’? Are you finishing your employment and expecting a refund? At this time of year near the end of tax year this is unlikely.

Secondly it sounds like you have quite large overheads if you have to buy products to sell them. I realise you have calculated your profit but I wouldn’t call that hardly any overheads.

By overheads I mean I do not have business space, staff etc etc

My boutique makes (profit) anything between 200-500 a week so it is difficult to estimate. Some months are quieter than others for example January didn’t make a lot at all which I expected with Xmas etc

However in the last three days I’ve made around £300 profit after the cost of the products

I’m just trying to work out if putting 10-15% by it too little. Probably better to air on the side of caution and put 20% by

Put 25% aside and then you get a nice bonus at the end of the year if your tax bill is less. And remember you have to pay on account for the next year so even if your bill is only 10% you’ll need another 10% anyway! Always overestimate your tax...then at least you will always have it!

You will have at least 20% for tax plus you will then pay 20f extra when upu ho into the higher tax rate,. 9% national insurance once you go over £8000.
In short 10-15% sounds far too little. What is this tax money you are expecting to get back?
Has your accountant made sure you are properly claiming every expense possible, especially those if you are working from your home- there are obes relevant.

You could increase your work place pension contributions, this will reduce your salary & keep you below 50k

My account (sic) has advised me to put around 10-15% of my profits aside for tax as she thinks il be able to get tax back to make up the other amount.

I am an accountant. I have no idea what this sentence means. What is ‘getting tax back’? What is ‘the other amount’?

Is your accountant saying that you may be able to deduct some expenses from your taxable profits and consequently your effective tax rate will be 15% or lower? That is quite a leap of faith.

I assume that you are a sole trader rather than operating through a limited company. In which case, ring fence the cash equivalent of 20% of your profit for 2020/21 to cover income tax on the profits. If you do tip over into higher rate tax, the amount that will be taxed at 40% will be relatively small, so you shouldn’t be scrabbling around for cash to pay it.

(Incidentally, the OP is correct that her overhead is low. The cost of the clothes she sells is cost of sales, not overhead).

Thanks everyone

I will put away 20% and maybe even some more as I didn’t realise I had to pay some towards the following years aswell

To be honest this boutique is really all going into savings anyway it’s just something extra for me to bring in

And by ‘getting tax back’ I mean on things like tax I pay for fuel to get to suppliers, tax paid of postage things like that. However there’s no way there will be much of that as I don’t travel that much and often my suppliers ship directly to customers so in reality the tax I will be able to claim back will be very little

The only tax you pay on fuel is VAT. There is no tax of any kind on postage. I don’t think that is what you meant, though?

Your accountant is saying that you might be able to deduct the cost of fuel from your profits when calculating your taxable income, which isn’t the same as ‘tax [you] pay for fuel’. However, you are correct that the amount you can deduct from your profit is unlikely to make much of a dent in your effective tax rate, so you are sensible to bank on paying 20%.

If you trade from home there are expenses you can claim, such as pro rata part of your rent/mortgage, council tax, fuel, telephone. broadband. packaging materials, software and hardware, etc. I claim everything right down to the last paperclip because better a pound in my pocket than the grubby hands of the tax man.

So, for example, if you have a room as your home office and another as a storage room for your stock you should claim for that % of your home running expenses. The HMCR website has recipes to use in calculating this, or you can do it yourself based on the actual % of your home you use.

The way to do this is to ensure that if you are using (say) a bedroom make sure it can still be used as a bedroom and not permanently altered as to its use. If you changed the "use" of part of your house (for example by installing industrial machinery and employing people to work on it) you could then be liable for business rates. However sticking a desk with a computer and a few shelves or hanging rails in a room is not a "change of use" because the room could still be used for its original purpose.

I claim everything right down to the last paperclip because better a pound in my pocket than the grubby hands of the tax man.

Yeah, that grubby old taxman, eh?

Remind me: how are state pensions, the NHS, schools, universal credit, emergency services etc paid for?

It’s such a grubby business, isn’t it?

I am just trying to work out if putting 10-15% by is too little

Well yes, as the tax rate is 20% and you may have a little to pay at 40%.

As I mentioned above, you need to find out what your accountant means, because it makes no sense to me. (I am an accountant of 28 years standing).