The MoneySaving Forum: join to chat & swap tips with other MoneySavers. Learn how in the Forum Introduction Guide

Archive for the ‘Tax’ Category

A warning to freelancers and the self-employed everywhere

Updated 22 January 2013

A warning to freelancers and the self-employed everywhere

A warning to freelancers and the self-employed everywhere

There is a lurking nightmare ready to strike many freelancers and the self-employed. Unlike employees, where tax is taken off before you receive your pay packet, freelancers are usually paid gross (pre-tax). But the psychology of this can cause financial havoc.

It’s something every newly self-employed person (or those who’ve never realised) needs to understand – another good reason for financial education in schools.

If you receive £100, it’s easy to think the money is yours – and that tax is just another bill to sort out each year when the time comes. That sentiment alone is enough to cause many to hit a tax-shock later when they realise they simply aren’t close to covering it, and not paying your tax is more than a little problem.

Instead, you need a different mindset. The secret, as I remember from my own freelance time, is to run by the mantra…

"For every £100 I’m paid, £30 isn’t mine."

Then EVERY time you get paid, simply siphon off the tax cash into a separate high interest savings account (see the Top Savings guide). That account shouldn’t be thought of as yours, you need to consider it "the taxman’s account" and as it’s someone else’s, you have no rights to it.

If you’re thinking your effective tax and National Insurance rate is less than this – perhaps you’ve many costs that can be offset – then alter the cash amount slightly (use the Income Tax Checker for a rough guide). But always err on the side of putting too much away. Then at the end of the year, once the taxman’s comfortably paid, any leftover money comes back to you.

Of course bigger earners paying higher or top rate tax may need to put away 40% or even 50% of what they get to hand over to our bowler hatted friend (not sure there should be an ‘r’ in that).

But I can’t afford to do that?

If that’s your response, there’s a real problem. Quite simply, the money isn’t yours, it’s the taxman’s. If you were an employee on the same pay, you’d never see this money. That’s how it works. Don’t allow yourself an undisciplined foray into this cash, or it usually just means you’re heading for big trouble.

In fact shifting cash aside isn’t just an effective trick in this situation alone. It’s actually the cornerstone of my piggybanking technique, which is all about putting your cash into lots of different accounts – not just for tax, but for bills and holidays too. It’s something many swear by (and a few act on).

I’d love your thoughts below on how you manage this, or how you’ve been caught out.

NB. The original February 2012 blog was written after the papers were full of news about TV presenter Miquita Oliver going bankrupt, owing the taxman £174,000. But that’s chip wrapping now, so I’ve removed it.

Council tax, 20 years since it was valued: a flawed system no one’s brave enough to sort out

Council tax, 20 years since it was valued

Council tax, 20 years since it was valued

Take a look at the back of your council tax letter, you’ll see that what band you’re in depends on the property’s value on 1 April 1991, twenty years ago today.  

This valuation was done in ‘second gear’ by estate agents and others driving past. It was a stop-gap measure, but in England and Scotland it’s still what dictates the amount we pay.  

I could go on about the fact you can do a council tax check and challenge to get cash back but that’s covered elsewhere on the site, and with today’s birthday I think more important is the ridiculous fact the system is still so outmoded.

Eric Pickles, why no change?

Back in 2008 I interviewed Shadow Minister Eric Pickles who held a document revealing the then Labour government was ‘hiding’ 400,000 homes in the wrong band. Now he’s in charge, he hasn’t done anything.

Six months ago, I had my chance to rant at his departmental Minister Bob Neill MP on Radio 2’s Vine, and (probably to shut me up) was soon invited in to discuss it (see backdoor revaluation opened? news).

There I argued they need to at least stop making appeals difficult for those who’ve been in properties over six months. It’s a SENSELESS rule as only since the internet age have people been able check their banding. Plus the workaround only really helps those who are pushy and comfortable playing the system.

They sat and nodded, said they’d consider it, yet four months on, I’ve heard nowt. So if you’re reading Messrs Neill and Pickles when will you sort this out?

Comment and Discuss

Related Past Blogs

Council Tax 6 month rule: proposing a halfway house to the Minister

Council tax appeal rejected as you’d lived in the property over 6 months?

Getting political about council tax

The MSE Leaders’ Debate ‘Not answering the question’ scorecard

Ed Balls’ reply to my Childcare agitation. Your suggestions urgently needed.

During the last year, behind the scenes, I’ve been agitating on what I believe is a scary major public policy hole with Childcare Vouchers and Childcare Tax Credits.

In a nutshell, some people using these government schemes designed to make childcare more affordable are actually potentially £100s or even thousands WORSE off and they don’t even know it.

The Low Incomes Tax Reform Group first alerted me to this, and back then we updated and clarified it in the site’s two guides. Yet I didn’t want to do a big ‘scandal story’ on it due to worry that it’d put many people, who rightly should be claiming these valuable benefits, off.

However, recently, as nothing’s happened, I turned the publicity temperature up a notch, and as my reply from the Secretary of State shows, it looks like things may finally move.

Why childcare vouchers can cost people money.

Before explaining the problem, a quick definition of each of these government schemes (operated by two separate departments – part of the reason for the problem I suspect): (more…)

Will killing commission kill financial advice?

There’s a worrying possibility that the FSA is about to kill off independent financial advice in the UK for all but the wealthy. I do hope I’m wrong.

It’s just confirmed plans of its Retail Distribution Review which, in a nutshell, means from 2012 Independent Financial Advisers will have to charge a fee rather than simply take their cash from commission.

Its valiant aim is to get rid of ‘commission bias’, where some IFAs are more prone to recommend products that give them higher commission.

Therefore, it may surprise you that I’m worried it’s a bad move, especially as most personal finance journalists tend to be in favour. I should note, this isn’t a core subject for me, so I’ve only read summaries of the proposals rather than word for word, but the gist is plain…

Setting the scene.

For those who don’t know, let me explain how it already works. This is taken from my financial advice guide, so you’ll be unsurprised to see the viewpoint I took when writing that starts to draw you along the path of this argument.

IFAs are… “paid in two ways, by fees or commission, and by law they are required to give you the option of either. While most journalists are very pro-fees and berate commission-based advisers, I believe both systems have merits.

  • Fees. Here they charge a flat hourly fee for their advice. Standard fees range from £75 to £250 per hour depending on where you live and what kind of advice you need. Make sure you ask in advance and compare costs.

    The great advantage of fees-based advice is there’s less incentive for advisers to bias their advice according to how much commission they’ll make, as they should pay any commission earned back to you – either in the form of a rebate or a boost to any plan (always ask and check this is happening).

    Plus, if you’re making a large investment or pension, then you’re definitely better off paying a fixed fee rather than commission, as commission increases with the size of the investment.

  • Commission. Advisers paid commission may seem to be giving advice for free, but over the long run they tend to make more money this way than by charging a fee upfront. Some plans can be extremely profitable and will make advisers a large amount of money. As an example, a typical upfront commission paid on a £30 a month level term life assurance policy for 25 years would be £600.

    The proof that commission impacts advice is that companies deliberately market increased commission rates to IFAs. If advice was never biased, then the rate of commission wouldn’t make any difference, yet product providers know that if they up the commission rate, they’re more frequently recommended.

    However, the commission route still has its merits. While there will be some bias, the legal obligation to give good advice means advisers tend to tweak at the fringes rather than give downright poor information. And the big advantage is that as you won’t need to stump up the cash each time, you’ll be less scared to seek help when needed; thus will continue to get retained advice. “

What’s the problem?

I’m not convinced most people will want to pay for advice. The commission route has the advantage that you don’t pay a fee each and every time you want information; you can go without the worry of laying out cash.

The advent of fee-only is likely to mean fewer people seeking advice and those that do may go for it less often to keep the fee down.

While in principle I support the FSA’s stance, in practice, I think it could be a nightmare from which we may not recover. I think I prefer the idea of people not getting perfect advice due to slight commission bias, than not getting advice at all.

Of course, it is also talking about systems whereby the commission is recouped up to a set fee, which is better – but still psychologically there is the danger here that people don’t want to pay an hourly fee in any system – it just looks too expensive.

The Real Nail in the Coffin.

What I find most galling though is that bank-based advisers – those primarily responsible for PPI misselling, endowment misselling, investment misselling and generally poor advice all round are still to be allowed to be remunerated based on the number of sales.

So bank advice, which as they can only look at a limited number of products, will become known as “restricted advice” (though it’s often far closer to sales tactics than advice) will be free and commission remunerated; yet you’re going to have to pay a fee to get a cross-market comparison. This seems to me a bias in totally the wrong direction.

Comment and Discuss.

Parking Fines. You can reclaim them…

Last December I was hit by a stonking great parking fine. It was £60 for parking opposite a sign that effectively said “no parking until 6.30pm” – outrageously my fine was for parking there at 6.35pm. I blogged back then that this would be the first of my reclaim campaigns I would actually be using myself (see Parking: my first reclaim blog).

So I sent off adapted template letters from the parking ticket appeals guide, for an informal appeal and crossed my fingers. I knew I may’ve upped the ante both by writing about it here, and including it in my News of the World Column and hoped the council wouldn’t get militant because of it.

Unsurprisingly, the first letter I got back was a standard rejection – with photos – explaining why I had no case, and if I didn’t pay up the £60, it would double to £120.

See the letter here…

Martin Lewis Parking Fine 1

I wrote back saying I didn’t accept this, and then I (again using the template letters) took it to a formal appeal. Then there was a delay, a seeming age – I wrote back in early Feb, yet it took until early April for me to get a reply…

In it came the fateful words:

“Our records show that the time plate to which you refer is incorrect, therefore on this occasion only we have decided to cancel this PCN”

See the full letter – again

Martin Lewis Parking Fine 2

So no fine to pay. Yet what’s outrageous is this WASN’T spotted on the first appeal; it admits the signage is incorrect, but it took me having to risk the fine increasing to get it sorted out. Worse still, the note says “restrictions can and do differ on opposite sides of the road.” Yet the only sign on either side in that street is the one giving the time to be 6.30pm

There’s a golden rule in this… if you think you’re right… go for it.

Comment and Discuss.