“There’s one for you, nineteen for me, ‘cos I’m the taxman”
Developing a habit of putting money aside to pay your taxes
The Beatle’s song, ‘Taxman’, might suggest that they were paying 95% tax but fortunately, I don’t think you’ll need to worry about that! However, if you’re newly self-employed or new to the entertainment industry (or even if you’re not), it’s wise to protect yourself against reaching the end of the tax year and finding you haven’t saved enough to pay HMRC.
Knowledge is always the key to being prepared. If you know roughly how much tax you’re likely to have to pay – and when – it’s easier to know how much you need to put aside for those occasions.
Last year, the government decreed that people in the entertainment industry who are given a self-employment contract for their services should be treated as self-employed for tax purposes and should pay Class 2 (and, if they are paid above the specified threshold, Class 4) National Insurance Contributions (NICs).
The tax year starts on 6th April and ends on 5th April the following year. It’s important that all of your taxable income is declared on your tax return – even if some items were taxed at source. These might include, for instance, promotional or merchandising work and bank interest.
The Showbiz Accountant can help you with your return. Paper returns must be sent to HMRC by 31st October following the end of the tax year; whereas online returns can wait for a further three months: they must be submitted by 31st January of the following year. Failure to submit returns on time brings an automatic penalty of £100, with more penalties added for further delays.
However, there’s a catch – after your first year of self-employment, HMRC will want payment on account for the following year. So, you’ll effectively be paying this tax bill twice – an extra 50% will be added to your main bill (to be paid by January 31st) and the other half must be paid by the end of July that year. All is not lost, however, as the following year the amount that you’ve paid on account will be deducted from your next tax bill.
How much tax do I have to pay?
You’ll be taxed on your total earnings but there’s a range of expenses you can deduct from your income (for examples, see our recent blog). What you can and can’t deduct as expenses can be confusing, but again we can help you so that you don’t miss out on possible items that you could claim for.
The current tax rates are:
Up to £12,500 0 (this is your Personal Allowance)
£12,501 – £50,000 20%
£50,001 – £150,000 40%
Over £150,000 45%
How much do I need to save?
As a rule of thumb (and depending on how much you earn), if you can put aside 25% of your gross earnings each month, that should easily ensure that you can cover both your tax bill and your NIC contributions.