Page 36 - DIY Investor Magazine | Issue 33

SOME INNOVATIVE THINKING TO MAKE YOUR TAX SET-ASIDE GO FURTHER
Taxes are one of the three certainties in life (shame on you
if you don’t automatically know what the third is, you need
to listen to Marvin Gaye). Those responsible for managing
their own tax (i.e. self-employed/gig workers, landlords, etc.) currently have to pay twice yearly. They should set aside either every month or a proportion from every invoice but they rarely do.
Instead, come payment time, they have to either dip into their main bank account or borrow – often they come up short
and then owe HMRC (who are many self-employed worker’s main creditor). Sometimes HMRC accepts a monthly payment arrangement; many times they will enforce the debt, and can take it all the way to a winding-up order for as small a debt as £750 (in normal non-COVID times).
Those of us who work with self-employed/gig workers are constantly advising them to set aside regularly as one of their most vital bits of financial management.
However, given that we don’t have the power to actually make transfers out of their main bank account into a separate place, most often our entreaties fall on deaf ears. Even repeating the mantra “it’s not your money, it’s the government’s” doesn’t work (especially when they see our respected leaders avoiding tax at every turn).
What we need is for them to really see the benefits of setting aside, including the avoidance of massive stress every 31st January & July, and to change their behaviour accordingly.
So here’s an innovative idea that might help with that persuasion. Most self-employed workers are operating on such tight margins and with such monthly income fluctuations that they assume there’s no way in which they can set aside regularly. They are so stressed about earning money that they haven’t the time or energy (or confidence or skills) to make money.
But they do have money to make money, if they’ve set-aside tax – they have a ready-made capital sum that they could use creatively as a foundation to build a savings/investment habit upon.
‘A READY-MADE CAPITAL SUM THAT THEY COULD USE CREATIVELY AS A FOUNDATION TO BUILD A SAVINGS/ INVESTMENT HABIT UPON’
Let’s take the example of Meena, an average self-employed worker who registered for self-assessment on 6th April 2021 (conveniently ignoring the actualities of living through the pandemic):
• In her first year of trading turnover was £30k. £30k less £6k allowable expenses less £12.5k personal allowance results in her owing about £4k Income Tax & NICs for the 2021/22 tax year.
• £4k plus another £2k as a first payment on account for 2022/23 means she will have to pay HMRC £6k on 31st January 2022.
• Therefore, if she sets aside 11% of the £30k turnover, i.e. £275 a month from 30th April 2021 she will have the £6k available after 22 months.
Now, let’s look at this situation if we have persuaded Meena to start some basic DIY Investing.
Obviously the main objective is to guarantee 100% that she can lay her hands on the £6k come 31st January, and of course investing all or part of that amount comes with its risks.
However, a 5% return on £275 a month will bring in around £250 to add to her ‘Fun Fund’, and even more if she also sets aside a bigger amount to build a Life Shocks pot.
DIY Investor Magazine · Apr 2022 36