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Sam
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Hello I am retiring from full time teaching after 36 yrs- 21st

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Hello I am retiring from full time teaching after 36 yrs- 21st April 2014 is my last working day as a higher rate taxpayer. I receive a pension after that of 17K a year and also wish to work part time in a consultancy role. How do I go about ensuring I get taxed at lower rate and sorting out registering as self employed from that date please.
I wish to set my tax allowance against my teachers pension and claim for costs such as travel etc against any additional income via the self employment route. Many thanks
Submitted: 3 years ago.
Category: Tax
Expert:  Sam replied 3 years ago.
Hi

Thanks for your question. I am Sam and am one of the UK tax experts here on just Answer.

When you retire you will be provided with a P45 - which details you pay earned, tax deducted and tax code, which I advise you ensure is passed to the pension department. This will ensure that the personal allowances are used against your pension.

You also need to register as self employed - and I have provided a link for you to undertake this
https://online.hmrc.gov.uk/registration/newbusiness/introduction

HMRC will then set you up under self assessment (if you are not already) and will issue you with a 10 digit unique taxpayer reference, under which all your tax affairs will be dealt with.

Between then and 065/04/2015 - you should keep records of your income from the self employed consultancy, and of course the expenses incurred.

If you are under age 65 - then you will start to pay Class 2 National Insurance, as a self employed individual - which you pay either y monthly direct debit OR quarterly - this amounts to £2.75 a week, and this contributes towards your basic state pension - the only exemptions from this are if you are under 16, over 65 or your earnings from self employment (the net earnings - so income less expenses) will amount to less than £5885 a year - in which case you have the option of asking for a small earnings exception certificate - which will exempt you.

Then come 05/04/2015 - the first year end, HMRC will issue you a self assessment tax return on which you declare your total income.
For the first year you will have employment for the period of time from 06/04/2014 to the date of retirement, and the pension, and the self employment.

HMRC will then review your total income position and any tax suffered from employment and the pension, are credited within this calculation, leaving a consideration of tax due for self employment - and also whether Class 4 National Insurance arises.
As your persona allowances would have first been utilised against your employment and then transferred to be utilised against the pension, then tax will be due on the net self employment position, But for Class 4 National Insurance, the first £7956 of the net self employment is exempt, with any amount over and above this amount charged at 9%

The tax you will owe, and any Class 4 National Insurance - then are paid the following 31st Jan (so in the instance of your first self employment tax year, this will be by 31/01/2016.
If this amount is in excess of £1000 - then you are also asked to start paying, payments on account.
Payments on account are determined by the tax bill that has just arisen, with an amount equal to a half payment being asked for at 31/01/2015 (so if you tax bill had been £2000 then you would be asked for the actual £2000 bill plus £1000) and another half payment at 31/07/2015. (so in this example another £1000)

This ensures by the time your second tax year of self employment comes around, and the following payment date of 31/01/2016, that you then already have some tax paid over towards this next bill.
The cycle then repeats again, with the tax return completion, the date by which the tax and any Class 4 National Insurance should be paid by, less paid on account and a new request for payments on account based on then this new latest tax bill.

Do feel free to ask any follow up questions on the information I have provided.

Thanks

Sam


Sam, Accountant
Category: Tax
Satisfied Customers: 13810
Experience: 26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
Sam and other Tax Specialists are ready to help you
Customer: replied 3 years ago.

Thankyou Sam- this is very clear.


When you say pass my P45 to the pension dept- do you mean HMRC pension dept-?


My consultancy work will be complicated by the fact I was employed by Cornwall Local Authority- and my school improvement consultancy-means I will be paid some from the local authority and some from each school direct.


I may also receive income from AfA a separate national sch improvement company.


Do I simply invoice them direct and they will not the local authority that is- take out any NI or tax- due to my registration as self employed?


 


I am 58 and therefore NI C2 will apply- presumably this is sorted with HMRC?


 


Lastly how much is it best to earn do you think- sorry a challenging hypothetical scenario... if I am paid at £400 a day- so avoid paying tax as much as possible- given that all my pension over the first 10K will be subject to 20% tax- ie the remaining 7.5K


 


Many thanks Sue

Expert:  Sam replied 3 years ago.
Hi Sue

Thanks for your response

By pension department - I means the teachers pension department - as they will be the one that can utilise the information from your P45 - (failure to give them the P45, then leads to them operating code BR - basic rate tax and issuing you with a form P46 to complete - which then takes time to get your personal allowances to be allocated against your pension payments)

The way in which you will operate with the consultancy seems like there could be some breach of employment legislation, as whilst the payments made direct by the school would appear to fall into genuine self employment (there are strict guidelines to employment status)the payments direct from the Local Authority and AfA may actually be paid as employment from each of those sources, this is something you will need to discuss with them, as this will (it would appear) be a regular income from these sources, to conduct work on their behalf, rather with your independent skill set.

You cannot chose to be self employed - and to aid you further with this I have added a link to the employment status legislation, so you can see how the guidelines are applied
http://www.hmrc.gov.uk/employment-status/

If both the LEA and the AfA insist that you have to be paid under PAYE (as an employee) then just make sure that tax code BR (Basic rate) is operated against these payments (as you do not wish to hand your P45 to them to use, as your personal allowances will be used by the teachers pension payments) but it may then also mean that Class 1 National Insurance (employee National Insurance) also has to be deducted if any payment is more than £153 a week/£663 a month (from each of the sources)
If that's the case, then you will always have employment income to also declare, and your self employment will then just comprise of the actual independent payments made by the schools.
But have a read of the link and legislation provided, and then have a chat with both the Local Authority and AfA as to how they view these payments and whether they feel they can be paid as consultancy, or whether they must be treated as PAYE (employment)

If you satisfy the conditions required to be self employed and the Local Authority and AfA are happy to accept this, then you will raise invoices , as to suit your business (so maybe weekly or monthly)

There is never a best income to earn, as anything over and above the £10K threshold, is always going to be liable to tax, and as you have a pension that already exceeds that threshold, ALL your additional income will be subjected to tax.
But to avoid breaching the 40% threshold, your total income should be less than £42,475
So with £17,500 used with the pension this leaves £24,975 available for 20% tax, which amounts to a position of 2081.25 a month or £480.28 a week so really this equates to 1.2 day a week. (if you are paid £400 a day)

Finally regarding the Class 2 position, HMRC, once you register with self employment issue you with a direct debit form - and if this is not completed, then quarterly bills are automatically sent for the payment due.

Do feel free to ask any further question, but it would be appreciated if you could rate the level of service supplied, as this ensures I am credited for my time.

Thanks

Sam







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