Tax return calculations 2017/18 – case study

I am a self employed freelance graphic designer and I expect to earn roughly £50,000 for the 2017/18 tax year after factoring in my expenses. I also rent out a buy-to-let property from which I expect to receive £5,000 of income after expenses, and I receive child benefit for one child. Can you give me an estimate of my tax liability?

 

Tax return case study 2017:18

 

Answer, February 2018

 

Before working through these tax calculations we’ll outline the tax rates for the 2017/18 tax year (6th April 2017 to 5th April 2018).

Income tax rates 2017/18

Assuming a non-Scottish UK resident tax payer the income tax rates for 2017/18 are:

These figures assume a standard personal allowance of £11,500

  • £0 to £11,500    0% Tax
  • £11,500 to £45,000    20% Tax
  • £45,000 to £150,000    40% Tax
  • £150,000+    45% Tax

The self employment profits and rental profits outlined in the question at the beginning of this article will be taxed at these rates.

Scottish residents have a different higher tax band to the rest of the UK for 2017/18, see here.

 

Self employed national insurance rates 2017/18

We also need to look at the national insurance rates for the self employed which for 2017/18 are:

 

Class 4 national insurance:

  • This is purely based on your self employed profits (i.e. it is not affected by other sources of income you have). 
  • It is calculated along with your self assessment tax return and is payable at 9% of profits between £8,164 & £45,000 and 2% for any profits above this.

 

Class 2 national insurance:

  • In the past this was paid directly to HMRC (not as part of your tax return) but this is now paid through your tax return.
  • It is charged at a rate of £2.85 per week if your business profits are above £6,025.

 

Both Class 2 and Class 4 national insurance are now calculated and paid via your self assessment tax return

 

Child benefit tax 2017/18

When it comes to child benefit – if you or your partner have an individual income of £50,000 or more, you’ll start losing the child benefit, and when one of you hits £60,000 income the benefit will be completely removed.

If your income is between £50,000 and £60,000 you will face a claw back of 1% of child benefit for every £100 of income.

The child benefit only gets reported on one tax return, so in the case of a couple it gets reported on the highest earners tax return.

 

Tax calculation

We can now work through the tax calculation for the question at the beginning of this article.

 

Income tax

The self employment profits and rental profits total £55,000, the tax calculation for this will be:

  • £0 to £11,500 at 0% Tax (as within the tax free personal allowance)
  • £11,500 to £45,000 at  20% Tax = £33,500 x 20% = £6,700
  • £45,000 to £55,000 at 40% Tax = £10,000 x 40% = £4,000

Total income tax £10,700 (‘A’)

 

Self employed national insurance

Next we need to look at the self employed national insurance charge:

Class 4 national insurance

  • £0 to £8,164 at 0%
  • £8,164 to £45,000 at 9% = £36,836 x 9% = £3,315
  • £45,000 to £50,000 at 2% = £5,000 x 2% = £100

Class 2 national insurance

  • Fixed rate of £2.85 per week = £2.85 x 52 = £148

Total national insurance £3,563 (‘B’)

 

Child benefit repayment

Finally we need to work out the child benefit repayment.

We are told the tax payer received child benefit for one child, we’ll assume for the full year and we’ll also assume that they do not have a partner earning more than them (if they did it would get reported on their tax return instead).

The child benefit payment for one child for 2017/18 is £20.70 per week, £20.70 x 52 = £1,076.

As described earlier – when it comes to child benefit, if you or your partner have an individual income of £50,000 or more, you’ll start losing the benefit and when one of you hits £60,000 income the benefit will be completely removed. If your income is between £50,000 and £60,000 you will face a claw back of 1% of benefit for every £100 of income.

The tax payer in question has total income of £55,000 which means 50% of the child benefit will be repaid through the tax return – 50% x £1,076 = £538.

Total child benefit repayment £538 (‘C’)

 

Tax summary

If we add up these three items – income tax (‘A’), national insurance (‘B’) and child benefit repayment (‘C’) this is:

£10,700 + £3,563 + £538

Total tax calculation for 2017/18 = £14,801

 

Reducing child benefit charge

If you receive child benefit and your income is over £50,000 you could consider either charitable gift aid or pension contributions, both of which would have the effect of pushing up the £50,000 repayment threshold.