I am likely to receive a settlement for 'loss of earnings' caused by the results of a car crash I was in, the other party is at fault and their insurers paying out.
Ny question is that they have indicated that the will pay the amount 'less Tax and NI', but I am Self Employed so:
I don't pay standard NI anyway, and my current year might not show any or little profit, and thus my tax due for the year will certainly not be at whatever rate they try to deduct from my claim.
So how should I proceed, should I insist (if I can) that they pay the sum in full, and then treat the sum as 'income' in my books. Or should I accept the sum and perform some sums on it at the end of year to recoup any excess tax/NI paid out of it?
When you say your current year might not show any profit, this is presumably largely as a result of the car crash. In quantifying your loss, you will presumably have worked out how much profit you would have made by year end if the car crash had not occurred, in other words you have some method for estimating the amount of gross lost profit attributable to the accident. Call this X.
No, that would be too complicated. You'd then end up paying 'tax' on this 'income' at year end to the company instead of the tax man.
Not quite. Whatever sum you get will be totally exempt and the IR will have nothing to do with it. Only the determination of the sum will have to take into account how much tax you would have paid on X, bearing in mind any tax boundaries X might straddle.
Essentially their initial assumption might be that you're employed and that a loss of gross earnings of X will mean you're out of pocket by 67% of X, i.e. 100% less 22% tax less 11% NI. But since you're self-employed, their assumption would be amended to give you 70% of X, i.e. 100% less 22% tax less 8% NI.
If, however, not all the gross loss X falls into the normal 8%+22% bracket, then obviously less of the X would have been taxed and so they should pay you a bit more than 70%.
The trouble is, even if you know X now, you don't yet know until your year end comes round, how much of X would have been taxed at the
0% and 10% rates instead of at 30%.
I think there are only two possibilities. Either you negotiate with them to agree an estimate now of your likely profit at end of year, and settle on that basis, or you agree an interim settlement on the
70% basis, with a correction to follow at year end.
Either way the arithmetic should be simple. E.g. if X is £20k, and if your (expected) actual profit is going to be only £615, then obviously £4k of the £20k would have been tax free, and £16k taxed at 30%, less a £235.20 rebate in respect of the lower rate band (£1960*(22%-10%)).
In this case the payout should be £4k + £16k*70% + £235.20 = £15,435.20.
I think they mean the amount they will be pay you will not be subject to tax & NI, but that it will be the equivalent that you would have received if you had been able to work after the deduction of the tax and NI that you would have paid, in other words your Net profit form your business less the tax you would have paid less the level of NI that you pay.
Thanks for that, Ronald, my case is a bit simple than your example, I should have quoted some figueres:
Time of work - one week Loss of earnings - £2,000 Average yearly turnover - £50,000 (I don't work every day/week) Expenses average- £30,000 plus Gross profit average - £20,000
So Tax/Ni due on £20,000 = 30%of £16000 - £235 = £4565 (I think).
With £2000 of income 'missing' tax due will be
30% of £14000, - £235 = £3965 ish
So I will be better off tax wise £600 , set against the 'tax' I will pay to the insurance company of 33% of £2000 = £660
Ok, so I'm only £60 out of pocket in this example if they use the 33% scale. But if I was on course to only pay myself a salary of £5,000 due to a poor year/clever use of costs etc - I might be in a position where I was not due to pay any tax, yet have had to pay £600 now onlt to reclaim it at the year end.
The other view of course is that there will be a £600 hole in my cashflow now, which won't be corrected until my next tax return - the £600 would probably be due to be paid as tax then anyway, but could be in my account preventing overdraft requirement until then.
These figures are highly suspect. Instead of "I don't work every day in the week" do you mean "I don't work every week of the year"? I don't see how an average profit of £20k a year can be used to justify loss of £2k earnings through one week off work, unless you only work 10 weeks a year and the week in question is provably one of the would-have-been-working weeks.
Also, you said earlier you will likely have no profit at all this year. How does that tie in?
No, not unless you're approximating £4615 to £4k. But no matter. So long as both the expected actual profit and the expected would-be profit are above £6575, and below higher rate liability levels, then you would have paid £600 tax on the £2000 extra profit you would have made, and so the company should pay you £1400.
No way can the company "charge you tax" at 33%. They *must* pay you the after-tax equivalent, in your circumstances, of the loss of £2000 gross. In your now stated circumstances that means 70%.
What are you on about? I thought you said you were self employed? You have no option to "pay yourself a salary of £5k" unless you are a Ltd Co.
Fair point. Suggest to the ins co that they pay you 100% now and you return 30% in due course.
Yes, that pretty much somes it up, I charge £400 per day or £2000 per week, but am 'on call' as a self-employed service engineer, so some days/weeks I work, but I can be off for days/weeks between jobs. The week after the accident I was booked and couldn't make it so the customer went elsewhere for an engineer - it could have just as well been a'quiet' week. My costs however are pretty fixed: car, workshop, expenses, fuel etc.
So my profit/salary averages around the £20,000 mark, the question about the 'if I only paid myself £5,000' in the other thread referred to if I have a really bad year for the rest of the year and only end up with a profit/salary of £5,000, then my tax bill will be zero- and I will be looking to reclaim the amount deducted by the ins. co.
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