Taxing The Brain
Avoiding A Nasty Shock.
Important caveat: This applies only to the to the UK, specifically England & Wales, where I am based.
For the purposes of this article, I am going to assume that you are treating money from writing as income, you are self-employed as a writer (even if you hold down another job) and are simply going to pay Income Tax and National Insurance on it. If your affairs are more complex (eg you have set up a company etc), then you need more specialist advice and to file accounts and pay corporation tax.
The Basics:
In the UK, there are two ways to pay your taxes (and National Insurance).
If you are employed, your employer will be deducting the appropriate amount of tax and National Insurance directly from your pay. This is called Pay As You Earn or PAYE. In this case, you probably don’t need to file a Self Assessment Tax Return, unless you are a higher rate taxpayer or receive benefits in kind eg a company car etc. Your tax is properly deducted and paid over to the tax authorities (HMRC) by your employer, who operates PAYE, by applying your tax “code number”. At the year end (the 5th April) – you will be given a form P60 so check it to ensure you’ve paid the right amount of tax! If you leave mid-year you’ll get a P45!
Always check the code number as it is your responsibility to correct it if it is wrong! You’ll always receive a notice of coding from HMRC to check. As long as you are receiving pay slips and having tax deducted you are classified as an employee for tax purposes.
If you are self-employed, (eg earning money from your writing, such as royalties) you need to file an annual tax return (known as Self Assessment). You may wish to use an accountant or do it yourself, using the government’s website at https://www.gov.uk/government/organisations/hm-revenue-customs.
As a writer, you may still be employed (paying taxes via PAYE) as well as earning additional money through writing (self-employed). In which case, you will need to file a tax return, on which you will also declare the PAYE figures.
This sounds horrendously complicated, but the good news is that things are pretty joined up these days. When you file your self assessment – your total (worldwide) income is declared and tax calculated on the global amount’ offset by a credit for tax that you’ve already paid under PAYE. Essentially this leaves only the tax from writing being due and payable (you won’t be charged twice!).
HMRC actually calculate how much tax you owe once you have completed your tax return and ask you to pay that sum by certain set deadlines, so don’t worry if the thought of complex calculations scares you.
Remember, at the end of the tax year, your employer will issue you with a P60. Hold onto this, as all of the information that you need for filling in the Employment supplementary pages is on this slip. If you leave a job, you will be issued a P45 which contains similar information.
You must register for SA by strict deadlines once you start receiving self-employed income and will be sent a ten digit Unique Taxpayer Reference number a UTR – this is basically the ID that stays with you for life, allowing you to file a return and for HMRC to retain all your tax records in one place on their system
Remember, unlike other jurisdictions, The Tax Year runs from April 6th to April 5th each year.
Everybody’s tax circumstances are unique – I am not going to touch upon that. But we all have tax-free personal allowances, details of which you can access yourself along with lots of valuable information on HMRC.gov. A word of warning — Class 2 and Class 4 NICs (National Insurance Contributions) are also payable by the self-employed (Updated for 2024/25 – there are changes to NICs for this year, so check the website for the latest information!)
Don’t Let Your Tax Bill Be A Nasty Surprise.
One of the strengths of the PAYE system, is that your employer deducts your tax and national insurance directly from your pay. Your Gross Pay is how much you are paid each month (eg if your annual salary is £24,000 pounds, your monthly TOP LINE pay will be £2,000).
However your Net Pay is your ‘take home pay’ – in other words, how much money is paid into your bank account after taxes etc are deducted by your employer. Because the money you owe in tax never actually reaches your account, you can’t accidentally spend it.
But If you are self-employed, it’s a little more complicated. For example, your royalties may be paid to you Gross directly via your publisher, through your agent (after their commission) or from the platform you publish on eg Amazon. If this is the case, you need to make sure you don’t accidentally spend all that money and then get a shock at the end of the tax year when HMRC ask you to pay what you owe.
So I recommend that whenever you receive a payment you put aside a chunk of that money and don’t touch it, so it is waiting for you at the end of the year. A very simple way to do this is to open a savings account and transfer the appropriate amount (perhaps 20/30%) into that account each month. Then, when you come to pay your tax bill you pay it out of this savings account.
So How Do You Know How Much To Put Aside?
Working this out can be as complicated or as simple as you want. The important thing is to make sure you put aside at least as much as HMRC are going to charge you. Anything above that is a bonus.
The simplest way of doing this is to simply calculate how much tax is owed on that sum of money (in 2022/23 this is 20% for lower rate taxpayers, 40% for higher rate – check the rates on the HMRC website) and how much NI you will owe (Update for 2024/25 NIC rates have changed – check the website. For the purpose of calculations we’ll go with 6% and no Class 4 NICs)
If you received £1,000 in royalties this month, put aside £200 tax and £60 National Insurance. Do this each month.
The benefit of this system is that you shouldn’t ever find yourself short of money when you receive your tax bill. The downside, is that it doesn’t take into account your personal tax-free allowance or any expenses allowable against your tax, so you may be putting aside more money each month than you need to (unless you have a second job and have used up your tax-free allowance). Of course, hopefully you still have this money, so you can think of it as an easy way of building up some savings.
This was how I started, and it worked very nicely. As I am a proud geek, I have tweaked this method to take into account more factors so it is more accurate, but the principle remains the same. We won’t get into the minefield of allowable expenses in this post but there’s info online that’s far more reliable than the man in the pub!
You Only Pay Tax On Your Profits.
As a self-employed writer, you are essentially a small business (known as a sole trader). Therefore, your net income is essentially your profits. That is, what is left over after you have deducted reasonable tax-deductible expenses. You should visit HMRC or seek professional advice for a list of what is currently regarded as a legitimate business cost (things change, so I am not going to detail them here).
Why is this significant? Well you can save yourself quite a bit of money if you deduct these costs from your profits.
Here is a very simple example.
(I am ignoring any personal tax allowance here, and assuming you are paying tax and National Insurance on your full profits at the standard 2034/24 rates of 20% and 6%).
Let’s say you earn £20,000 from writing.
You need to pay 20% tax on that (20% x£20,000 = £4,000) and 6% NI (6%x£20,000= £1200). Your tax bill would therefore be £5,200.
However, let’s assume that you clock up £1,000 of reasonable tax-deductible expenses.
Your profit is therefore £20,000 – £1,000 = £19,000
20%x£19,000 = £3,800 and 6%x£19,000 = £1140 – your tax bill is therefore £4,940 – you’ve saved £260 on your tax bill!
Caveat: Don’t forget however, that you have spent £1,000 on expenses, so you are still out of pocket. Just less than you would be if you hadn’t claimed and paid the £1,000 outright.
Now HMRC won’t just take your word for it. They have the right to insist upon seeing receipts and royalty statements etc to ensure that you are paying the correct amount – basically, they can audit you. Audits are called COMPLIANCE CHECKS or the old-style tax investigations, and whilst they are pretty rare and not at random, but targeted, you still need to be prepared just in case. You need to retain all business records for at least 6 years.
So here are a few basic things you should do to make sure that you are ready. It can also act as a checklist of what an accountant might wish to see.
- Record in a spreadsheet or accounting software all of your income, along with the date received. Record any legitimate expenses.
- Retain any royalty statements etc. I personally prefer electronic (back it up!), but paper is fine.
- Retain any receipts or invoices (as above).
- It’s worth considering having a separate bank account solely dedicated to your writing (and imperative if your income becomes regular or substantial), so that you can easily cross-reference the date on your royalty statements or receipts and invoices with the date on the bank statement. Perhaps even consider a writing-only credit card?
- If you get into the habit of dealing with everything at the end of each month, it isn’t such a big job in January!
- Do your tax return early! The deadline for electronic filing of your SA is January 31st after the end of the tax year. You can file the tax return from April 6th (the day the new tax year starts). That is almost 9 months, so why do it so early?
- First, you don’t have to pay any money until the January 31st deadline. Knowing how much that bill will be will let you plan and make sure you have the money ready. Second, it might take longer than you think – so why stress yourself out at the last minute? Third HMRC will be very busy as the deadline looms, so avoid hours in a queue listening to bad music, and phone them for advice earlier in the year. Fourth, you get to feel really smug when January rolls around and everyone else starts panicking.
- One final reason is a rather nasty little surprise that HMRC might have for you. Known as ‘payments on account’, whereby they will also demand half of next year’s tax bill (with the rest to follow in July). They do this by simply assuming you’ll pay the same tax next year as this year. Doing your taxes early makes it easier to plan for this delightful surprise.
- Just in case you’re worried about paying twice, this money is basically credit against the following year’s tax bill, so you will only have to pay the balance then (plus the following year’s ‘pay on account’). If you owe less tax next year, the difference can either remain as credit on your account or you can be refunded it.
Remember. The above information is NOT TAX ADVICE, and I certainly can’t answer any questions. But if you have any thoughts about ways to make this annual chore easier, please feel free to share here or on social media.
If you are a writer with a tip to share, or fancy writing a fictional interview between you and one of your characters, please feel free to email me.
Paul.
