Self employment advice needed

[tigwig]

Hi, my hubby has recently started working for himself as a bricklayer/builder. We have registered with the Inland Revenue for tax and NI contributions and are planning on opening a seperate bank account to money away for tax but don't know how much of his wage we should put away for. If he is paying NI monthly through dd will there be any additional to pay at the end of the tax year and is about 25% of his wage too much or about the right amount to put away? Also, because his customers are giving him money for materials upfront, he pays it into his bank account and pays for materials on accounts so not only is he paying money in his personal bank account to cover the cost of materials when he gets the bills through he is also paying his wages in the same account too so I am worried the Inland Revenue will think all the money is actually his earnings! Should he have a seperate account for this as well or will all these details be filled out when he does a tax return?

[auzzie]

It is always advisable to put earnings from self employment into a separate bank account, it saves a lot of hassle and easier for your accountant to reconcile. ( Abbey do free banking for business, but it is postal and not branch based, check their website) The taxman, if he wanted to, could check your personal accounts anyway if he was suspicious about anything!
As to how much you should be saving for tax purposes depends very much on his earnings. I would have thought that as a basic rate taxpayer (taxable earnings below �34,600) than 25% would be more than adequate with probably some left over! BUT it all depends on his income. It is probably wise to speak to your accountant who would be in a much better position to help you.
And dont forget the dreaded VAT club! If his turnover, not net profit, goes over �67,000 he will need to register for that too Good Luck and i hope this helps a little.

[tigwig]

thanks, so just to clarify is it ok to put the money he gets for materials and his earnings into 1 bank account without the taxman thinking it is all his profit?
Also he will definitely not be earning anywhere near �67000 so VAT shouldn't be a problem

[Tom Braider]

Using the same bank account for everything is a bit risky but you should be OK if you keep all the relevant receipts and invoices. As always, good record keeping is vital.

[anniebird]

Unless your current account is paying interest it is better to keep the money for Tax and NI in a savings account to earn some interest as you will be holding this money for a few months.

[hev]

Hi I am a tax man and my best advice is to keep everything as simple as possible. Keep receipts for everything you are claiming for as an expense. It really doesnt matter that he has money for materials going in to the same account as he will have the receipts showing what he has bought. Even though he pays NI class 2 by DD he will pay NI class 4 on any profit at the end of the tax year this is currently 8%. If you keep 20-25% of his earnings back you will have enough to pay the bill. Remember though if the tax due goes over �500 then the tax office will expect you to pay payments on account for the next year which will be half again added to the bill.

[Gromit]

As well as Class 2 National Insurance, you will have to pay Class 4 which is 8% of your yearly earnings, so you need to save nearer 30% of your earnings for tax. Not forgetting you also be paying 50% of next years projected tax as well).

[tigwig]

Hi hev thanks for your answer and everyone elses. Could you just explain what you mean when you say if the tax due is over �500 we will have to pay more payments on account for next year too please. Do you mean if the tax bill is �500 more than we will have put away? How does paying for the next year work?

[moomintroll1]

If the tax due in one tax year is over �500, you have to make payments on account to cover the following year's tax.

The first payment on account is due in January, and the second in July. Each payment on account is calculated as half of the previous years' total due.

Let's assume that your husband's first tax return will be due next year, and he owes �1000 in tax. This has to be paid by 31 January. He will also have to pay �500 by the same date, which will be his first payment on account.

He will then have to pay �500 by 31 July, for the second payment on account.

When he completes his second tax return the year after, he will have already paid �1000 towards it. If the bill is more than this, he will have to make up the difference by 31 January (and pay the first payment on account for the year after). If it is less, he can either claim a repayment, or leave the money there to cover future tax bills.

So, you may want to put aside a little more for the first year to cover that first payment on account, as it can be an unexpected double whammy if you're not careful.

[tigwig]

thanks for that I had no idea about that at all. I understand now!

[auzzie]

tigwig, just a little add on. Are you being paid to do his books? Are you a partner / self employed? If you are going to be a paid bookkeeper other than through PAYE you will fall within the Money Laundering Regs and will have to register
http://www.hmrc.gov.uk/mlr/beginners.htm

I think the fee is �95 per annum.