This is not advice. This post is information only from my experience.
January is a month of Monday’s, or it is a chance for a fresh start. I suppose it’s about perspective. For me, January 2022 is a fresh start, and I am positive about the year ahead. And that is despite my self-assessment tax being due before the end of the month.
In previous year’s, tax has been an issue for me, and this was down to a lack of understanding. Like January 2017, when I had a self-assessment tax bill of £7000 that I wasn’t expecting.
A few years earlier I’d taken a loan from my Limited company (DUFFY ELECTRICAL) to buy my current home. If you take a loan out of a limited company, you pay tax on it. Now I had already paid half of this tax 2 years earlier. But forgot about the other half. This tax and bill finally caught up with me in January 2017. That and the fact that I’d taken more money out of DUFFY ELECTRICAL in 2016.
This was a particularly bad year for me and personal finances. I’d earned good money between 2012 and 2016 but pretty much spent what I earned. In 2016, my income reduced due to market conditions, but my spending didn’t reduce. In fact, my spending increased as we went on more holiday’s and got an upgraded car.
Factor tax in from the start
One of my issues with tax is that I never put my tax money aside. I started working via a Limited company from January 2012 onwards. My income increased and I saved good money. I never factored tax in and always thought I had more money than I had.
When you start a limited company, you get 21 months to pay your first tax bill – your corporation tax. This was well and truly at the back of my mind. If I could go back, I would have put 20% away each month into a separate account for my tax. But this has been my way of doing things money wise. I learn the hard way.
Being clueless with tax was just one of many financial mistakes I made between 2008 and 2018. Don’t be like me. Learn from my mistakes and speak to an accountant about your tax situation. Ask them questions based on your financial position and makes some notes. And remember to put money aside each month for your tax.
Clueless with tax
Let me take you back to 2015. I was earning good money and had built up £70,000 of premium bonds. Instead of buying assets like rental properties, I put my money into premium bonds expecting a big win.
I have my money in premium bonds, so I am in a good head space financially. But remember, I wasn’t really taking tax into account. When my tax bill came at the end of October, I didn’t really have it in my business account.
To pay for my tax bill, I got a loan. This loan was roughly 7% APR. What I should have done was taken the money out of the premium bonds. But I was genuinely convinced I would win £1 Million. In reality, I earned less than 1% interest from my savings. On one hand, I’m earning less than 1% interest with my premium bonds. On the other hand, I’m paying 7% interest with my loan.
This shows a complete lack of financial literacy. This is how I rolled during my negative period between 2008 and 2018. It was negative because I was negative about property. I was negative about money. To be brutally honest, I was negative about everything. Funnily enough, I was also negative about tax.
Fast forward to 2022 and I am happy to pay my share. I am happy to pay my tax as I know that it pays for services like the NHS and the other emergency services.
Understanding your tax situation
The following example is going to be hypothetical, and we will use the limited company I have recently set up to buy rentals.
Corporation Tax for Limited Companies
The current tax rate for 2022 is 19%. We will use an £80,000 turnover to avoid the added complication of paying VAT.
Let us imagine DUFF PROPERTIES has earned me £80,000 and my accountant manages to knock off £20,000 in expenses from the top line. I now must pay corporation tax on £60,000 and that would be £11,400 (19% of £60,000).
I am now going to imagine I have sacked contracting off and DUFF PROPERTIES is my full-time job. The money I have left over after expenses and corporation tax is £48,600.
My first £12,500 is tax-free. I am going to spend it all, so I have another £36,100 to spend. This will be classed as dividend payments.
Looking at dividends, the first £2,000 is tax-free. The remaining £34,100 is taxed at 7.5% and this totals £2,707. This will take my total tax for 2022 to £14,107.
The £11,400 from above will be paid to HMRC Corporation TAX. The £2,707 falls under my self-assessment that needs to be completed by the end of January to avoid fines.
To see the guidelines for self-assessment tax or any other tax, visit HMRC.gov. For me personally, I get my accountant to complete my self-assessment to ensure it is done correctly. My self-assessment will take into account PAYE tax I owe from taking dividends out of my Limited company.
Self-assessment payments are due by 31st January (1st payment) and also 31st July (2nd payment).
If you are required to complete a self-assessment, you or your accountant will need your UTR (Unique Tax Reference), NI (National Insurance Number) and Employer reference. Another point is that you may have to pay 50% of the projected self-assessment for the next year. This is where it can get a little complicated so it might be worth sending your accountant a quick e-mail for clarification.
This is me finally getting to a point where I understand my tax situation. It took me years to get to a point where I was ok with tax and fully understood my tax situation. Me not knowing anything about tax caused me issues and brought with it anxiety. Understanding your tax situation will help you with personal finance from my experience.
As I have said I am happy to pay my tax. And this is the case with any profits I make on my crypto assets. This is a bit of a grey area for me and most other crypto investors.
After a brief conversation with my accountant last year, I sort of know the tax implications. My understanding is that the first £12,500 is tax free. Anything after that is subject to 18% tax. Please don’t quote me on that and remember this is not advice. This is information only.
What I need to do is some more research. I need to do some more digging and more reading. Maybe a little meeting with my accountant is required. When this happens, I will do another little post. I’ll be doing a post focusing on crypto tax so anyone interested in crypto investing, is aware of the tax implications.
By the way, if you want some more info on personal finance and investing, you can always read my 1st book.
If you want info on property, you can read my 2nd book. The Dormant Landlord is a brutally honest account of my property journey over the last 20 years.