THE Inland Revenue has given itself new powers to charge an effective 50 per cent rate for those with extra income from buy-to-let, other investments or freelance work, The Times has learnt. More than three million people could see their pay packet hit.
Those who have become used to enjoying freelance earnings tax-free for up to 16 months before paying a tax bill are to be targeted in the crackdown. From April, they can be charged monthly on their entire earnings through pay as you earn (PAYE). Those on modest salaries could see their bills double overnight.
What about allowable expenses?? [Where you might have eg one *huge* expense mid-year, and only small expense amounts at other times. This one big expense may exceed one month's (/week's) income!]
Isn't it just a matter of noting the SE profit declared on the most recent tax return, extrapolating this to the following year, and then offering to collect the tax via the tax code *instead of* via the mid-year payment on account?
The Times hasn't learnt that because it isn't true, not that journalists on even supposedly heavyweight papers seem to let the truth get in the way of a story these days ...
But what if the work is seasonal - so that the tax collected should actually be lower initially (because less earnt earlier in the year) then higher later in the year?
What if there is a particular *large* expense early in the tax year which needs tax relief, and which could even be larger than a single month's earnings?
Then you opt out. This seems a bit of a storm in a teacup. AIUI this is really meant for people whose main source of income is their PAYE job and whose SE business is a sideline.
Will they make this easy? If so, why doesn't *everyone* do it?! :-)
"Ronald Raygun" wrote
If so, then surely the effect on overall tax rate on the PAYE pay would be slight? Wouldn't you need to have a fair amount of "sideline" to get the overall tax rate up to the 50% "limit"??
The example given in the article shows quite the opposite - main source is non-PAYE :- "For example, someone earning 40,000 a year with annual rental income of 50,000 would easily exceed the 50 per cent threshold.".
It might actually suit many people to spread their tax throughout the year, rather than having to part with a sizeable lump sum.
The example given in the article is just a journalist's flight of fancy. We don't have any official announcements yet which would support their conclusion, do we?
Surely this was announced at the last Budget and contained in the Income Tax (Pay As You Earn) Regulations 2003?
The article is just based on the Revenue's new power to calculate an employee's PAYE tax code based on projected earnings not subject to PAYE. They have to take account of payments on account already made and the employee can opt out anyway. I don't see the problem.
But the sizeable lump sum would not be due until *after* all the "spread" tax would have been paid!
So it would be worthwhile opting-out, then paying the "spread" tax to a savings a/c across the tax year, waiting a bit after the end of the tax year, then paying the "sizeable lump sum" to the IR (just before the due date) while pocketing the "sizeable interest" generated within the savings a/c! :-))
You mean like buying TV licence stamps? I'm not convinced. See below.
That's all very well in theory, but many people will be tempted to spend the money rather than have the discipline to let it sit and grow in a savings account. And don't forget about the sizeable tax being deducted from the sizeable interest being earned on the sizeable lump sum. :-)
To return to your first point, though, at present (assuming a self-employed financial year ending on 31/3, and also assuming level earnings throughout the year) tax in respect of profits is due an average of 13 months after they're earned. That is, in effect, tax on profits from April to September 2003 is due at the end of July 2004, and tax on profits from October 2003 to March 2004 is due at the end of January 2005. Profits from April to September are in hand, on average, at the end of June, and the July in question is 13 months later.
If tax is instead to be paid via the PAYE code, the earliest deduction would be made in April 2005 based on information in the tax return sent in by end January 2005 in respect of the FY 2003/04, and therefore the deduction would be on the basis of a twelfth of the extrapolated profits for FY 2004/05. In effect, therefore, your PAYE payslip for April 2005 would show a deduction in respect of tax on SE profits earned during April 2004, an average of 12.5 months previously. The deductions made via the April to September 2005 payslips would replace the lump sum payment due in July 2005.
So yes, you'd be cheated out of a half month's interest on a whole month's tax. That's hardly sizeable, is it?
Tax in respect of profits from April 2003 to March 2004 is "due" in *three* parts (as I'm sure you already know): POA in January 2004, POA in July 2004 and a final Balancing Payment (if relevant) in January 2005. Indeed, if profits remain equal from year to year (and all allowances also remain equal!) then the tax for April 2003 to March 2004 will be paid in two equal instalments in January & July 2004 (because the POA will have been "correct") - *not* in July 2004 & January 2005.
Thus "on average", the tax is paid around *7* months after it is earned (average of 1 April to 30 September 2003 is 1 July 2003, and average of 1 October 2003 to 31 March 2004 is 31 December 2003 - check the numbers of days!).
"Ronald Raygun" wrote
Agreed.
"Ronald Raygun" wrote
See above - should be January, 7 months later.
"Ronald Raygun" wrote
Where does TY 2004-05 come into it? Latest reported figures were for TY
2003-04 (reported January 2005), and this will need to be applied to TY
2005-06 (ie when you start in April 2005).
"Ronald Raygun" wrote
Your tax in PAYE payslip for April 2005 will be in respect of April 2005 - will it not? Just because the figure used is estimated from the pay earned during April 2003 doesn't matter. Tax is paid basically "on time" (you might say a half a month "late").
You are paying tax for the *current* year through PAYE - *plus* you will still be paying the POA for TY 2004-05 in January and July 2005, plus the Balancing Payment (if any) for TY 2004-05 in January 2006. Again, assuming pretty-much equal earnings from year to year, the Balancing Payment will be near-zero.
"Ronald Raygun" wrote
Nope - the PAYE tax payments made April to September 2005, the first half of TY 2005-06 (average mid-July 2005), would actually replace the lump sum payment due at the end of *January 2006* (on average 6-and-a-half months later). With the PAYE tax payments made October 2005 to March 2006 (the second half of TY 2005-06, average mid-January 2006) replacing the lump sum payment due at the end of *July 2006* (again on average 6-and-a-half months later).
"Ronald Raygun" wrote
Except that your "half month" should be re-stated as "6-and-a-half months" - certainly worthwhile!
As you pointed out, the two POAs during 2005 are due in respect of profits (which it is estimated will be) earned during the period April
2004 to March 2005. The POAs relate to 2004-05 but are estimated from information about 2003-04 reported in January 2005. The tax code allocated on the basis of information supplied in January 2005 would normally be applied from April 2005, would it not? That suggests that the extra deduction from the April 2005 pay packet includes tax on SE/other income relating -in effect- to April 2004.
Of course the principle of PAYE is to collect tax in respect of income of the current month, but that's for income from employment. Any additional tax being collected via an adjusted tax code would surely be based on information reported in the latest tax return, and will therefore involve a delay just as the POAs do. No?
Well, if that's really the case, then it is indeed a disincentive to opting in. The POA system at least has breathing space built in, to absorb SE income fluctuations. Without it, there is a potential (and unacceptable) need to pay tax on profits before the profits are in hand. On the other hand, the sooner you pay your tax, the less chance there is of spending it on fripperies and then having no cash left when the tax is due.
BTL is a case in point, where it makes little sense to tax in this way because unexpected voids will upset the cashflow and it's plainly daft to pay tax on rent you haven't received.
That's why I can't see it making sense except to those whose SE income is a sideline and whose PAYE income is their main source of income. Any one who's *seriously* self-employed would not be on PAYE at all, of course, so is out of the picture anyway.
There is some merit to this system, though, and it's probably easier to pay like this via the pay packet than having to make explicit
6-monthly payments, in much the same way as it's easier to pay council tax by direct debit. Perhaps what we need is a system where you are given a tax code as before, but that it's flexible and that the employee can always instruct the employer to apply a lower code at a few days' notice, so that you can in effect pay extra tax whenever you like and at any level you like, but not less than the allocated code unless you've previously overpaid.
I think the point is that one has to opt *out*. The tax code adjustment is to be made automatically based on the last tax return. Because of general lack of knowledge and inertia many people will just accept the new code. "Jam today" for the Treasury.
The articles I saw were pretty hopeless - emphasis on the 50% rate (with the point that no more total tax would be collected buried later in the article).
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