How is my tax calculated? Why is it so high?

I’m a self-employed singer/musician – how is my tax calculated?

ReceiptsIt is a common misconception that tax is calculated on your income/revenue/billings, and that the costs incurred for your business as a singer/musician are then deducted from that tax calculation. I wish it were true but sadly not.

This blog post assumes your only income is from self-employment and you have no PAYE income, interest, dividends or pension.

At the end of your accounting or tax year (this may change from April 2018), you work out what your income is whether from teaching, concerts, adjudication, publishing, royalties etc. You then work out your allowable costs that can be offset against this income. Typical allowable costs can be found on my blog post site or you can sign up at the bottom of my webpage for a full document at www.performanceaccountancy.co.uk/musicians.

Having got those two figures, you have a profit (or loss). From here, you can deduct capital allowances for any major purchase you may have made e.g. a new piano, computer etc.

You are then left with your taxable profit. As an individual, you get a personal allowance of £11,000 for the tax year 2016/2017 and that is deducted from your taxable profit.

Income tax is then calculated on that figure if it is greater than zero. Tax is at 20% but goes up to 40% at £33,500 (after the £11,000 allowance).

That is only the first lot of tax to pay on your taxable profit. If your pre allowance taxable profit is greater than £8060, you then have to pay 9% Class 4 National Insurance over that amount. To top it off, if your taxable profit is over £5956, you have to pay £145.60 for class 2 national insurance if you are over 16 and under pensionable age. woman_puzzled_7863

As an example, Sandra earns:

Private teaching               £16,500

Concerts                              £4,200

Allowable Costs                 £3,600

iMac Purchase                   £1,200

 

Therefore her profit is £17,100 and her taxable profit is £15,900.

Her tax calculation is:

Taxable Profit                    £15,900

Personal Allowance          £11,000

Total                                      £4,900

Tax @20% on £4,900       £980

Class 2 National Ins          £145.60

Class 4 National Ins          £765.60

Bill for current year        £1831.20

 

Sadly for Sandra, it does not end there as she owes more than £1,000, she will have to make a payment on account for next year – more on that in a later post.

 

Hopefully that clears up how tax is currently calculated for the self employed.

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