First year of self-employment has ended - guidance please!

[briangriffin]

Hi,

I fully appreciate everyone's case will be different but I'd be really grateful for some general advice if possible please.

• Basic rate tax UK sole-trader, no complicated anythings - just me working from home (software)
• First year's income £30k

Question 1:
Without any deductions what would I expect my tax liability to be? My understanding is £3,500. That being made up of a tax-free personal allowance of £12,500 in 2018/19 and then 20% income tax on the remaining £17,500 that I earned.

I would then go on to claim permitted expenses against the £3,500 liability which would reduce the £3,500 downwards based on my allowable business costs incurred across the period.

Question 2:
As I understand it HMRC allows two approaches for what I can claim, as someone who works from home.

• The Simplified expenses route which is a basic table of "number of hours worked at home = £n per month can be claimed"
• The more complicated "percentage of expenses" route where I take general household bills (mortgage interest, electricity, broadband, council tax....) and calculate what percentage of those my business activities consume?

I work "remotely" from home 100% of the time so it feels like the second option may be more beneficial, but I'd like to get it right and can't find an online guide to doing the calculations.

Thanks in advance!

Steve

[Craig@Clarity]

Hi Steve,

Question 1:
Without any deductions what would I expect my tax liability to be? My understanding is £3,500. That being made up of a tax-free personal allowance of £12,500 in 2018/19 and then 20% income tax on the remaining £17,500 that I earned.

I would then go on to claim permitted expenses against the £3,500 liability which would reduce the £3,500 downwards based on my allowable business costs incurred across the period.

Your personal allowance would be £11,850 in the last tax year 2018-19. It's 12,500 in this current tax year. The basics is that you take your self employed profit and then work out the tax. So the income tax on £30k profit would be £11,850 @ 0% and the remaining £18,150 @ 20% = £3,630.

If you had expenses of £10k, then the profit would be £20k and you'd simply apply the above method to that.

On top of your income tax, you'll have class 4 and class 2 NIC to pay too when you calculate your tax. Class 4 NIC is 9% on profits over £8,424 and class 2 of £153.40 for last year.

Question 2:
As I understand it HMRC allows two approaches for what I can claim, as someone who works from home.

• The Simplified expenses route which is a basic table of "number of hours worked at home = £n per month can be claimed"
• The more complicated "percentage of expenses" route where I take general household bills (mortgage interest, electricity, broadband, council tax....) and calculate what percentage of those my business activities consume?

I work "remotely" from home 100% of the time so it feels like the second option may be more beneficial, but I'd like to get it right and can't find an online guide to doing the calculations.

There is no black and white rule written down. It's down to applying a reasonable calculation based upon the things you've mentioned (mortage interest, rates, utilities, insurance etc). I'd recommend working out the number of rooms in your house excluding kitchen, bathrooms and hallways and working out a business percentage against the number of rooms you use as an office. So for example you have 5 rooms and 1 of those is an office, your business percentage would be 1/5. Work out the running costs of your household and then apply 1/5 to it. Reduce it even further by the number of hours you use the office for work. Have it all worked out on a spreadsheet so that you have evidence to support your reasonable claim for working from home. That should be all you need.