Self Employment - Poverty Trap ????

[D 129]

A few months back my employer decided that all its instructors should be self employed. The rate of pay was not affected (no salary, just an hourly rate when working) and there wasn't any choice anyway.

Before the change I might turnover £ 14 K. The tax man agreed to give me an extra £ 2 K of tax allowances a year, so last year with say £ 8 K of personal allowance a total tax frree sum of about £ 10 K. So pay tax on £ 4 K.

Under a self employed scenario, it seems much worse. I still turn over £ 14 K. I still spend about £ 2 K on licence renewals, uniform, medicals, AOPA etc. I can now claim my mileage as an expense - about £ 3 K. Hence I now pay tax on my profit of £ 9 K.

Am I missing a trick here ?. With this amount of cash I can hardly find new things to spend my money on, merely to bring the tax bill down !.

Thanks

Note - The employer is small company so I understand that they don't want the hassle of minimum wage, national insurance and pensions etc. I also have taken on some flying work elsewhere as I understand that HMRC may otherwise "insist" that I remain an employee - which the employer would not want !

[Heston]

I have no professional basis for saying this other than that I am in similar position to you. Its nothing like as bad as you think because you still get your personal allowance of 8k or whatever after all the expenses are taken off. And you can claim expenses for many more things than you think. So you shouldn't pay much tax at all on those figures (which are remarkably close to mine). Ask around and get a good accountant - pay them a couple of hundred pounds to do your tax return, it'll save more than you pay them.

Hope this helps/is reassuring

[A and C]

I can't echo the advice of Heston enough, get an accountant to help you it will save you a lot of money.

[D 129]

Thanks Heston and A and C.

Would be interested to hear confirmation from anyone out there that you still get your personal allowance to apply against your profit before paying tax ,,

Cheers

D 129

[mad_jock]

You need to go and have a look at the tax website.

You also have to pay your own NI contributions.

If you have stayed the same per hour rate you will have had a reduction in wages.

A few months back my employer decided that all its instructors should be self employed. The rate of pay was not affected (no salary, just an hourly rate when working) and there wasn't any choice anyway.

The tax man won't be very happy.

[Heston]

Would be interested to hear confirmation from anyone out there that you still get your personal allowance to apply against your profit before paying tax ,,

Its all on the HMRC website (takes a while to find everything, but its in reasonably clear English). The thing is that its not "profit", its "income". hence why the personal allowance still applies.

MJ is right about the NI contributions though.

And working in more than one place is important to justify claiming the mileage from home to work (if you only ever work at one location you can't claim it).

The above works for me anyway.

[Dan the weegie]

Would be interested to hear confirmation from anyone out there that you still get your personal allowance to apply against your profit before paying tax

Of course you do :) along with all the other personal allowances.
The reason your employer is so keen to do it is because it's much cheaper for him and he doesn't have to pay for payroll, employers NI and your holidays.

Mad Jock is talking pish, you pay class 2 NI contributions which are £2.70 a week.

IF you go get yourself a good accountant you will overall pay quite a lot less than you did before :). Get an accountant, they tell you what you can do legally and then for a relatively small fee arrange it all for you :).

In fact you SHOULD be no worse off than you were as an ordinary PAYE employee but the reality is that PAYE people don't use all of their tax free allowances the way that Self Employed people do so if you get an accountant to do it, you will almost certainly be better off.
You just don't get holiday or sick pay.

If what you say is true about having no choice, what your employer has done is essentially illegal you could try and take him to a tribunal, however I don't know how that might affect the rest of your career.

As MJ says, HMRC wont be pleased with your employer. They aren't pleased with any flying schools generally. I have a friend who works in their investigations department, they've taken quite a few schools to court over the whole self employed/PAYE issue and HMRC so far have lost every one. So they'll be annoyed but not much they can do.

That said, I suspect they will have something to say about your employer switching the same people from PAYE to self employed. Again, a complaint to HMRC like that will almost certainly result in you losing your job.

Go get an accountant :). The flying school owner will still be a flying school owner long after you're gone and flying shiny jets.

[D 129]

Thanks everyone for your input.

Feeling quite a lot better.

Followed up on the NI - It's Class 2 - about £ 3 / week until profit (not turnover) hits £ 8 K then the NI is 9%. (Class 4).

[cockney steve]

^^^^^ and another aside,- If your "profit" is low enough, you don't have to pay NI, they credit you with payments.:)

Yes, you get mileage, but important to log work V private use and apportion the costs accordingly, though there is a flat-rate mileage allowance agreed by HMRC, I'm not sure if it applies to s/emp.(don't forget depreciation! )

Proportional phone, stationery, and even office-cost (heat/light/rates/water) if you keep one room of the house exclusively for business use...all claimable

The downside is, you paddle your own canoe! NO WORK = NO CASH...no holiday pay, no paid Bank- holidays, odd sickies, illness or personal injury or incapacitance are your own tab...so save wisely to tide you over a lean period.

I had about 4 days sick in ~35 years' self-employment. it does wonders for the health!

Remember , YOU are the boss!factor-in your overheads to arrive at a realistic hourly rate....remember what an employer carries is around the same-again as what he pays the employee.

Make sure you CYA with insurance!!! (It's tax-deductible! )
hth.

[PPRuNeUser0173]

I believe a precedent has been set in that an Instructor at Sherburn made a claim against HMRC and it is no longer a requirement to have more than one source of income - flying school wise. Not sure of the specifics but may be worth checking out...

[dobbin1]

^^^^ and another aside,- If your "profit" is low enough, you don't have to pay NI, they credit you with payments.

How does this work? I have an exemption from paying NI, but AFAIK I am not accruing any further NI for pension purposes. After the latest changes in UK pension rules I may have to make voluntary payments in order to qualify for the full state pension.

Am I missing something?

[2close]

I have completed the HMRC Empoyment Status Indicator, entering the details that applies to the vast majority of "self-employed" instructors and according to HMRC most "self-employed" instructors would be "employees" and not "self-employed".

It's not simply a case of how many engagers you work for; it has more to do with the amount of control and liability you have related to the task in hand.

What expenses are incurred by SE instructors?
What liabilities are incurred by SE instructors?
What control over their working day do they have?

Now, if you supply the aircraft, etc. that is a different matter.

Don't take my word for it though; try the ESI Calculator for yourself.

https://esi2calculator.hmrc.gov.uk/esi/app/index.html

The following is the reference for the entries I put in.

HMRC ESI Reference: PTBLAW45F75LPM

[OpenCirrus619]

I believe a precedent has been set in that an Instructor at Sherburn made a claim against HMRC

The full report is here:
http://www.egos.co.uk/ir35_cases/full/SHERBURN%20AERO%20CLUB%20LTD%20v%20REVENUE%202009%20SC_full. pdf

It's pretty boring - but on page 25 states:
I hold that the flying instructors engaged by SAC during the period from 15 August 2005 to 5 April 2006 and during the year 2006-07 were engaged under contracts for services and were thus not employees or employed earners.

OC619

[BigEndBob]

I was told a well known airline employs on a self employed basis, so the contract is with one company, similiar to being an instructor, so how does that work?
Of course i forgot its not a UK airline.
And don't forget about Tax Credits, especially if income below 10k.

[RTN11]

I was told by one school that the only way the tax men would truly be happy is if the students were the customer purely to the instructor, paid them in full, and then the instructor paid the school for use of the aircraft and classroom.

Of course this would then raise issues with insurance, and the fundamental authorisation of flying schools and how they operate, so ultimately you can't please everyone, and if you have to piss someone off it may as well be the tax man.

[xrayalpha]

Ultimately, the Sherburn case tells the tax man what is and is not unacceptable to HMRC regards self-employment and flying instruction.

If a school and any flying instructors working there were to choose to follow that case, subject to any changes in the tax laws (which may have been prompted by the Sherburn case?), then the school and any flying instructors working there could be fairly sure that the instructors were legally self-employed for HMRC purposes.

Of course, that decision related solely to flying instructors. If you are a driving instructor, then different rules may apply until you or HMRC take your specific case to court.

Online calculators are, unfortunately, general rather than specific.

[Capt Pit Bull]

Things to consider:

Sole Trader versus Limited Company. I recommend the latter; you can pay yourself your tax allowance (which is a cost to your company and thus reduces your profit), pay corporation tax on your profit, then take the rest as a dividend.

And as others have said, you can claim all sorts of expenses. You'll need an office to do your paperwork. Rent a room in your house to your business. etc etc.

Extra costs: An accountant. You'll also need insurance.