[Finance] Self employed to receive 80% of income from the Gov’t too

[drew]

I will do this the once, then I'm out. In your example.

The driving instructor has a turnover of £3,125 per month and expenses of £800 per month (assuming that covers petrol, wear and tear and all other sundries)
This leaves a Profit/Income of £2,325
The Government is going to pay 80% of that - £1,860

The PAYE employee is getting income of £3,125 per month and expenses of £0.
This leaves Income/Profit of £3,125
The Government is going to pay 80% of that - £2,500

The PAYE employee will get more from the Government, because his income is greater than the Driving Instructors profit. Whether he spends that income on rent, mortgage or the occasional hour of 'Lawrence Dallaglio' is neither here nor there

If the PAYE's Income was the same as the Driving Instructors Profit, the Government would pay them the same, but in your example the PAYE person had a larger Income/Profit to start with.

And, if I where you, I would stick with the AA and not go independent

 

[LlcoolJ]

Looks like I’ll be missing out as my occupational pension is similar to my self employed earnings.

Difficult to say without looking at the individual case. But that is possible yes, unfortunately.

 

[Nitram]

Don't forget, it's the cumulative totals of the last 3 years that define the qualifying (as I understand it).

*edit* Just realised, that may be wrong. I haven't actually seen it definitively explained as majority of earnings for last tax year or last 3, for qualifying - Anyone ?

Thanks, I was working it out over the last 3 years.

 

[Shropshire Seagull]

The relationship is money in. After that they both go off at different tangents.

Going back to the self employed driving instructor. An AA instructor will have a weekly franchise fee of £190, circa £800 per calendar month which is included as an expense from a tax point of view. They then have, for example, rent of £1000 per month. Let's assume their total income/turnover is £3,125.

Leaving everything else aside, their profit is £2325 so they'll get £1860 leaving them £860 after paying the mortgage.

The PAYE employee will get 80% of their salary, ie £2500 and, for argument sake they pay £1000 rent as well, that leaves them £1500.

Now there are a hell of a lot of other variables but I hope the above clarifies why, just because a figure of 80% is mentioned by the chancellor, it doesn't mean both sectors are being treated the same. Hell, it would probably be impossible to treat all self employed the same!!!

You MUST NEVER consider business expenses in the same way as personal expenses [as you have done above i.e. franchise is a business expense, [house?] rent is a personal expense].

Your franchise [business] expense is incurred as a necessity of running your business so can be deducted from your business turnover [what you charge your customers]
You are mistaking business income [called turnover] as money in - it's not money in if you have expenses that you incur to enable that income to be generated [e.g. franchise, fuel, vehicle insurance] - your business "income" is what is left after deducting legitimate costs for providing/running your business [this is called gross profit] - this is what you then pay tax on, leaving you with a net profit.

If you consider to treat the money your customers hand over to you for your driving lessons as income rather than turnover then you are missing the point of business costs.

Others have tried to explain this but you appear unwilling to recognise this key concept ....

 

[LlcoolJ]

You MUST NEVER consider business expenses in the same way as personal expenses [as you have done above i.e. franchise is a business expense, [house?] rent is a personal expense].

Your franchise [business] expense is incurred as a necessity of running your business so can be deducted from your business turnover [what you charge your customers]
You are mistaking business income [called turnover] as money in - it's not money in if you have expenses that you incur to enable that income to be generated [e.g. franchise, fuel, vehicle insurance] - your business "income" is what is left after deducting legitimate costs for providing/running your business [this is called gross profit] - this is what you then pay tax on, leaving you with a net profit.

If you consider to treat the money your customers hand over to you for your driving lessons as income rather than turnover then you are missing the point of business costs.

Others have tried to explain this but you appear unwilling to recognise this key concept ....

Edit - I agree but I'll leave it.

 

[Shropshire Seagull]

[MENTION=5208]drew[/MENTION] - apologies if you have already mentioned in an earlier post, but how long have you been a self-employed AA driving instructor?

If it's more than a year, do you prepare your own business accounts or do you engage an accountant [or someone else] to prepare your business accounts for you.

Similarly, I assume you complete an annual self assessment for HMRC each year - do you fill this in yourself or does someone do it on your behalf?

Just interested like ...

 

[Giraffe]

Interesting to see in the detail that the calculation of the 80% is based on basic salary only. That is going to hit people (or businesses if they take the hit) hard who work in a sales environment where 50% or more of their pay is in commission.

 

[LamieRobertson]

It’ll be interesting to see how straightforward it will be to lodge a claim

 

[Pavilionaire]

That's not correct.

£100 profit for an employer - £12.12 zooms away in employer NI, leaving a gross £87.88 salary, less 42% PAYE and NI = £50.97 net in pocket

£100 profit for a Ltd Co. contractor - 19% CT leaves £81 payable as dividends, less 32.5% income tax = £54.68 net in pocket

I think you've over-complicated this.

If you give a Higher Rate employee £100 more gross salary he will pay income tax of 40% and Class 1 NI of 2%. He will receive £58.00 net, the tax is £42.00.

If you give a Higher Rate director £100 more profit he will pay 19% corporation tax, and if he draws the remaining 81% as dividend he will pay 32 1/2% tax, so £26.33 dividend tax. The director will receive £54.67 net, total taxes = £45.33.

The director is worse off by £3.33.

In your example you've deducted Employer's NI from the £100, which is a cost to the employer, not the employee. Indeed, the self-employed don't have the burden of Employer's NI, so they'll get the full £58 compared to the director's £54.67, and this shows the perception of directors as tax-dodgers compared to the rest of us is well wide of the mark.

 

[Questions]

Well being self employed myself I’ve rang through ahead on this one saying I wouldn’t mind cash.

 

[LlcoolJ]

Well being self employed myself I’ve rang through ahead on this one saying I wouldn’t mind cash.

Did they offer you 20% less but no questions asked?

 

[schmunk]

I think you've over-complicated this.

If you give a Higher Rate employee £100 more gross salary he will pay income tax of 40% and Class 1 NI of 2%. He will receive £58.00 net, the tax is £42.00.

If you give a Higher Rate director £100 more profit he will pay 19% corporation tax, and if he draws the remaining 81% as dividend he will pay 32 1/2% tax, so £26.33 dividend tax. The director will receive £54.67 net, total taxes = £45.33.

The director is worse off by £3.33.

In your example you've deducted Employer's NI from the £100, which is a cost to the employer, not the employee. Indeed, the self-employed don't have the burden of Employer's NI, so they'll get the full £58 compared to the director's £54.67, and this shows the perception of director's as tax-dodgers compared to the rest of us is well wide of the mark.

I've not over-complicated, you've over-simplified. There is an inherent 13.8%(ish) NI markup for a business in paying an employee, compared to paying a Ltd Co. for the same service. You can't just ignore that in a like-for-like comparison. It's the whole reason why businesses have agreed (or compelled, in some cases) to engage quasi-employees in the place of real employees.

Are you denying my calculations in the rest of my post you quoted?

 

[LlcoolJ]

I've not over-complicated, you've over-simplified. There is an inherent 13.8%(ish) NI markup for a business in paying an employee, compared to paying a Ltd Co. for the same service. You can't just ignore that in a like-for-like comparison. It's the whole reason why businesses have agreed (or compelled, in some cases) to engage quasi-employees in the place of real employees.

Are you denying my calculations in the rest of my post you quoted?

No he's just saying that you're a ****.

This issue has been more than covered.

Your tone is just spiteful and frankly the complete opposite of what's needed right now.

 

[drew]

[MENTION=5208]drew[/MENTION] - apologies if you have already mentioned in an earlier post, but how long have you been a self-employed AA driving instructor?

If it's more than a year, do you prepare your own business accounts or do you engage an accountant [or someone else] to prepare your business accounts for you.

Similarly, I assume you complete an annual self assessment for HMRC each year - do you fill this in yourself or does someone do it on your behalf?

Just interested like ...

Sorry, just to clarify, I'm not with the AA. Their franchise fee provides a car. I was using them as an example as their franchise fee is a fixed cost that you would pay. The company I'm with, you use your own car but the fee is considerably less. I do my own self assessment and have done so for the last 9 years of tax.

 

[BN9 BHA]

It’ll be interesting to see how straightforward it will be to lodge a claim

How straightforward ? I bet it won't be straightforward at all, probably a 30 page online form telling them stuff about my accounts they already know

Me and forms do not get on

 

[drew]

You MUST NEVER consider business expenses in the same way as personal expenses [as you have done above i.e. franchise is a business expense, [house?] rent is a personal expense].

Your franchise [business] expense is incurred as a necessity of running your business so can be deducted from your business turnover [what you charge your customers]
You are mistaking business income [called turnover] as money in - it's not money in if you have expenses that you incur to enable that income to be generated [e.g. franchise, fuel, vehicle insurance] - your business "income" is what is left after deducting legitimate costs for providing/running your business [this is called gross profit] - this is what you then pay tax on, leaving you with a net profit.

If you consider to treat the money your customers hand over to you for your driving lessons as income rather than turnover then you are missing the point of business costs.

Others have tried to explain this but you appear unwilling to recognise this key concept ....

I haven't confused business expense with personal! All I have stated is that the business expense is something the driving instructor deducts to arrive at his profit. His personal expenses then come out of his profit. In the basic example I gave, I showed that after deducting the business expense of £800 he was left with £2325, ie his profit. He get's 80% of that which is £1860. He then has to pay his rent leaving him £860. The PAYE has salary of £3125 and gets 80% leaving £2500 and then he pays his personal rent from that leaving him £1500. People seem to be getting hung up on income/turnover when the issue are the fixed business expenses, eg the franchise fee that the instructor still has to pay.

 

[LlcoolJ]

How straightforward ? I bet it won't be straightforward at all, probably a 30 page online form telling them stuff about my accounts they already know

Me and forms do not get on

Some idiot on the news yesterday was confidently stating that the process will be simple because HMRC have everyone's bank details.

This is an example of why nobody should believe a lot of what is being reported re the compensation schemes.

 

[BN9 BHA]

Some idiot on the news yesterday was confidently stating that the process will be simple because HMRC have everyone's bank details.

This is an example of why nobody should believe a lot of what is being reported re the compensation schemes.

Can I send my form to you?

I know it won't be simple for me, I'm lucky my wife is the brains of the family and works in finance and very good at doing my accounts, I will have to ask her nicely

 

[LlcoolJ]

I haven't confused business expense with personal! All I have stated is that the business expense is something the driving instructor deducts to arrive at his profit. His personal expenses then come out of his profit. In the basic example I gave, I showed that after deducting the business expense of £800 he was left with £2325, ie his profit. He get's 80% of that which is £1860. He then has to pay his rent leaving him £860. The PAYE has salary of £3125 and gets 80% leaving £2500 and then he pays his personal rent from that leaving him £1500. People seem to be getting hung up on income/turnover when the issue are the fixed business expenses, eg the franchise fee that the instructor still has to pay.

But that makes sense. If you're self employed then of course you only get to use your PROFIT for personal expenses.

The whole thing works because your NET income is being assessed tax wise. Not your gross, as that would be insane.

In your example, the guy on PAYE would have to be on a lower salary to be comparable.

Obviously.

 

[Pavilionaire]

I've not over-complicated, you've over-simplified. There is an inherent 13.8%(ish) NI markup for a business in paying an employee, compared to paying a Ltd Co. for the same service. You can't just ignore that in a like-for-like comparison. It's the whole reason why businesses have agreed (or compelled, in some cases) to engage quasi-employees in the place of real employees.

Are you denying my calculations in the rest of my post you quoted?

We're not talking about the employer, we're talking about the recipient of the remuneration and the Higher Rate employee / self-employed gets £58 compared to the director's £54.67.

I think you're having a conversation with yourself.