I am working full-time until my mobile hairdressing business establishes itself. What tax and national insurance should I be saving?
You should have notified HMRC when you started in self-employment. As you are now regarded as self-employed, you will need to get accounts prepared (showing your sales, costs and net profit) for the first trading period of your mobile hairdressing business and then every year thereafter. This will form the basis of your income tax and national insurance liabilities for the years ended 5th April. You will need to complete a tax return showing your income from employment as well as the sales, expenses and profit figures from your first year’s mobile hairdressing accounts.
For income tax purposes, profits from your hairdressing business will be added to any other income you received (such as employment) in the tax year to calculate your total taxable income. Income tax and class 4 national insurance on your business profits is payable in two instalments on 31 January and 31 July together with an adjustment of any balance owing the following 31 January. So for the tax year 2009-10 (the current tax year, 6th April 2009 to 5 April 2010) you should make payments on 31 January 2010 and 31 July 2010 with any balance owing on 31 January 2011.
Your income tax personal allowance (£6,475 in 2009/10) will be in your code number used to calculate the PAYE (Income Tax) you pay on your full-time employment. Income tax is payable at the basic rate (of 20 per cent) on earnings up to £37,400 (after the personal allowance). So if your combined employment income plus hairdressing business profits are less than £44,875 (£6,475 plus £37,400) the income tax on the business profits will be 20 per cent. If your total earnings exceed £44,875, some of your hairdressing profits will be subject to income tax at the higher rate of 40 per cent. You also have to factor in national insurance contributions (NIC). Class 4 NIC is payable on business profits between £5,715 and £43, 875 at a rate of eight per cent (and one per cent on profits above £43,875).
So what are your taxable profits likely to be? You will need to keep records of your takings and expenses. Most expenses should be allowable as a deduction against your takings. As the business is a mobile hairdresser, the expenses of running the vehicle (minus any personal use) will be an allowable deduction. Any equipment you bought (hairdryers, for example) are also likely to be a 100 per cent deduction. So assuming your expenses are largely allowable and your combined hairdressing profits and employment income do not exceed £44,875, if you save between 25 and 30 per cent of your turnover (sales) each week/month, you should have sufficient money set aside for income tax and NIC, when the payments on account fall due. After the first year your accountant should be able to advise you on future liabilities.
See also: Tax help for new businesses