Tax advise needed for new self employment

Kieron
Kieron Settling In NicelyRegistered Posts: 24
Hi,

Can anybody please advise on the following;

A mate of mine is currently employed earning £40k per yr so pays tax @ 40% through PAYE.
He is in the process of setting up as self employed at weekends in a different role and wll earn approx £7.2k per year (in addition to his salary) and so will submit a tax tax return annually. Will he need to pay 20% on these earnings or will the 40% be applicable as his total gros pay will still be over the threshold of £34k - any advice would be greatly appreciated.

Comments

  • Richard
    Richard Trusted Regular Registered Posts: 373
    He will pay tax at 40% on anything over £35k after his personal allowance -

    Salary - £40,000
    S/Emp - £ 7,200
    TOTAL - £47,200
    P/All - (£ 7,475) (assuming he receives standard allowance - this also increases in April)
    Taxable = £39,725

    Tax paid = £35,000 @ 20% = 7,000
    £ 4,725 @ 40% = 1,890

    If he is currently earning £40k before his allowance is deducted, he should only be being taxed at 20%
  • Kieron
    Kieron Settling In Nicely Registered Posts: 24
    Thanks, that makes sense, I assume this would be easy enough to show on an annual tax return and that he would not need to have this spread over the year through his PAYE?
  • Richard
    Richard Trusted Regular Registered Posts: 373
    Yes, on his tax return he will disclose his total income, (including bank interest, dividends, etc), the tax already deducted at source, ie PAYE, and then pay the difference to HMRC.

    In theory, this will only be the tax on his self-employment income.
  • mahdi87
    mahdi87 Well-Known Registered Posts: 121
    Kieron wrote: »
    Hi,

    Can anybody please advise on the following;

    A mate of mine is currently employed earning £40k per yr so pays tax @ 40% through PAYE.
    He is in the process of setting up as self employed at weekends in a different role and wll earn approx £7.2k per year (in addition to his salary) and so will submit a tax tax return annually. Will he need to pay 20% on these earnings or will the 40% be applicable as his total gros pay will still be over the threshold of £34k - any advice would be greatly appreciated.

    he ll be better off incorporating and trade as LTD company and that would save loads of tax I believe!
  • JodieR
    JodieR Experienced Mentor Registered Posts: 1,002
    Just to add to this - remember that he will need to pay class 4 NI if his profits exceed £7225. I'm not sure whether he'd need to pay Class 2 though - I think that there's an exemption for people who pay a considerable amount of class 1 NI.

    Also, he'll probably be able to have the tax due on self employment collected through the following year's tax code.
  • Monsoon
    Monsoon Font Of All Knowledge FMAAT, AAT Licensed Accountant Posts: 4,071
    mahdi87 wrote: »
    he ll be better off incorporating and trade as LTD company and that would save loads of tax I believe!
    Not necessarily; on just £7k of income, the higher costs of administering a Ltd might not make it cost effective. It needs looking into properly.
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