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According to my calculations, my annual income of 30k as a sole trader will be taxed at 0 pounds, but I'm wondering if this is wrong?

30,000 minus two personal allowance is 13,800 taxable income. That equates to 230 pounds in tax per month according to various tax calculators online.

But then, since I work from home, I can receive tax deductions for part of my rent, council tax, energy bill, internet, etc. - an amount (if I'm not wrong) which equates to more than 230/mo.

Can it be correct that I'm paying no tax this April or am I missing something?

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I'm assuming this is the UK given the mention of "council tax", though I'm not sure where your personal allowance figures come from - the personal allowance for 2015/2016 is £10,600 and for 2016/2017 is £11,000, so (£30,000 - two allowances) would be less than £13,600.

However in any case your predictions are wrong for two reasons.

Firstly, the personal allowance isn't generally transferable between spouses. A small amount of it - 10% - is if one of you pays no tax and the other is a basic rate tax payer, as you would be with an income of £30,000. You need to explicitly apply for this - see https://www.gov.uk/marriage-allowance-guide.

As a sole trader, you would be making the income so would be the one liable for tax. If you were to incorporate and pay your wife dividends from a company, you might be able to make better use of her personal allowance, but you need to very careful about the legal arrangements. Also with a company the tax position gets a lot more complicated and you have to worry about things like corporation tax.

Secondly, if you have deductible expenses, those are subtracted from the taxable amount, not the actual tax due. So for example if you have £15,000 of income all taxable at 20%, your tax bill ignoring expenses is £3,000. If you have expenses of £3,000, then tax is charged on (£15,000 - £3,000) = £12,000 - i.e. the bill ends up being £2,400. Another way of looking at it is that you get 20% of the expenses - £600 - knocked off the bill.

  • Paying your wife dividends - if she doesn't actually own part of the company, and if HMRC thinks that she only gets dividends because she is your wife, you can / will be in trouble. – gnasher729 Jan 4 '16 at 7:20
  • @gnasher729 good point, have emphasised this is a tricky route. – Ganesh Sittampalam Jan 4 '16 at 7:36
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    @gnasher729 by definition dividends go to shareholders, so it's impossible to pay them to someone who doesn't own part of the company. – Nigel Harper Jan 5 '16 at 10:04
  • If his wife does any work for the company, such as helping with admin, he could legitimately treat her as an employee and pay her a suitable wage which would count as a deductible expense. – Nigel Harper Jan 5 '16 at 10:06
  • @NigelHarper: A small UK limited company typically has a share capital of 100 shares for £1 each. If the wife owns £49 worth of shares and is paid £10,000 in dividends then HMRC will want a really good explanation. Typically for the husband the explanation is "I worked my ass off all year for £10,000 salary a year". If she can say the same, fine. If not, the couple is in trouble. – gnasher729 Jan 5 '16 at 15:14

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