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Where Taxpayers and Advisers Meet

Just switching to self employed - queries on timings and Payments on Account

Dustinthyme
Posts:1
Joined:Mon Dec 30, 2019 12:17 am
Just switching to self employed - queries on timings and Payments on Account

Postby Dustinthyme » Tue Jan 07, 2020 11:56 pm

1. I have been made redundant as a higher rate taxpayer employee. On 1st February 2020 I start as a self-employed freelance. Gross income is projected at £3,500 monthly. I estimate my monthly profit at approximately £2,940 (after deductible business expenses). The HMRC online calculator works out at approximately £562 monthly tax and national insurance combined (£6,751 per annum).

2. I am confused about
• the timings when I will need to pay tax and NI Class 2 and 4 on my self-employed income, and
• how this will be calculated, especially because my income will be less than half what it was compared to when I was on PAYE.

Questions:
a. When do I need to submit the self-employed tax return on my freelance income for February and March 2020?
b. When do I pay tax and NI on that freelance income for February and March 2020?
c. How and when will I be expected to make “payments on account” of tax and NI for self-employed income in my first year of trading (February and March 2020)? And the second year of trading (April 2020 to March 2021?)
d. How do I persuade HMRC to limit their requests for payments on account, based on my new projected freelance part-time earnings income at less than half what it was as PAYE salary?
Any pointers gratefully received
Thanks :)

robbob
Posts:3228
Joined:Wed Aug 06, 2008 4:01 pm

Re: Just switching to self employed - queries on timings and Payments on Account

Postby robbob » Wed Jan 08, 2020 9:58 am

Hello Dustinthyme

You only ever get one self assessment bill per tax year - that bill takes everything into account as on overall calculation - so if you have change of circumstances you need to crunch the overall numbers for the tax year which run for period 6/4/2019-5/4/2020.

so employment income + sole trader profit + any other taxable income less expenses on which you can claim relief.

Tax due will be tax as appropriate on that overall level of income less tax deducted at source for employment - there may be other adjusted if you are higher rate and have pension payments or charity payments etc.
Class 2ni will be weekly limit * number of weeks you are sole trader in tax year.
class 4ni will be 9% on profits over 8632
Note you can avoid paying class2ni if your profits are below 6365 to 5/4/2020
You may get discount on ni if you have maxed out on employment ni

Practicably speaking if you only have two months income before 6/4/2020 - you will probably have no ni to pay unless you elect to pay class2 ni voluntarily.

If you are higher rate taxpayer due to employment then cash basis may save a wad of tax if you dont get paid for march work till after 6/4/2020 - in which case you can use cash basis and pay tax on income when received next year which will likely avoid higher rate tax.

It is common that you are effectively over taxed when you leave employment in year - so if you have not had any refund of tax in year - the final calculations may give you a very pleasant surprise.

Payments on account ye 5/4/2021 are only needed if your tax bill ye 5/4/2020 exceeds £1,000 - you may have no payments if 80% of tax due is collected at source ye 5/4/2020.
Don't forget to save each month though as if you have no payments on account your next tax bill will likely be 1.5 years tax if your tax stays the same.

Deadline for tax return year ended 5/4/2020 is 31/1/2021


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