How to earn £2,000 without having to tell the taxman
NOTE – FOLLOWING THE PUBLICATION OF THIS BLOG SOME OF THESE ALLOWANCES HAVE BEEN REMOVED FROM THE 2017 FINANCE BILL FOLLOWING THE DISSOLUTION OF PARLIAMENT PRIOR TO THE GENERAL ELECTION. PLEASE SEE OUT LATEST BLOG HERE FOR FURTHER DETAILS.
“A little bit added to what you’ve already got,” as P.G. Wodehouse was fond of pointing out, “gives you a little bit more.”
We can’t argue with that. And if you’d like to add a tax-free £2,000 to your income (or £4,000 if you are married), then draw up a chair and listen closely.
The secret is found in guidance the taxman has just issued on new annual tax-free allowances for property or trading income.
In brief, if you earn £1,000 or under from property and another £1,000 or under from trading, you don’t have to pay tax on it – and in many cases won’t have to register for self-assessment.
To explain, let me introduce you to Bob. He is employed full time as a mechanic, so his employer deducts his income tax and national insurance contributions automatically.
Bob likes to earn a few quid on the side, though. Because he lives near a train station, he rents out his driveway to commuters during the week. This counts as property income – and if he earns £1,000 or less from it, he doesn’t have to tell the taxman (though he has to keep records).
During his holidays, Bob also does painting and decorating jobs for friends. This counts as trading income. Once again, he can earn £1,000 in this way without having to tell the taxman or register for self-assessment.
Better still, as Bob is married and his wife helps with the decorating jobs, they can earn £2,000 from each activity between them – and they jointly own their home,meaning they can rake in up to £4,000 annually without having to pay tax on it.
Tax free income? Where’s the catch?
As always when it comes to tax free money, things aren’t as simple as they first appear.
The first thing to remember is that the test is to be applied to turnover, not profits. So if Bob turns over £1,001 from decorating all is not lost. Assuming the actual costs of the decorating business were £200 Bob can claim the £200 or he can claim the £1,000 allowance. This is an allowance not an exemption.
Okay so Bob will have to complete a tax return and indicate he has claimed the allowance – we will know what box to tick when we see the 2017/18 tax return is a year or so.
The second thing to bear in mind is that the property allowance does not apply to income from renting out a room. So if Bob has income from lodgers his tax obligations are unchanged by this allowance.
Thirdly, if Bob has say trading losses brought forward then has a bad year and his business turnover in a year is £1,000 it will make sense to complete a tax return. Bob would not want the tax man assuming the trade has ceased with the losses being “lost”.
The final thing to note is that the allowances only apply from this year. So if Bob has been making money on the side in previous years, he should still have declared it on his previous tax returns. If he hasn’t, and he fills in a self-assessment tax return and claims the new relief on both trading and property income, the taxman may wonder why income from these activities has not been claimed in previous years and if that happens, Bob could well find himself at the centre of a tax investigation.
For help with your tax
If you are in this position, we strongly recommend you get professional advice. We are very happy to help you get your affairs in order and ensure you pay the minimum amount of tax. Why not give us a call today and talk to one of our tax experts…?