This has been revised and updated by the Union’s auditors, HW Fisher & Company, Chartered Accountants. Please note this is for general information only and no-one should take action, or refrain from taking action, without obtaining professional advice.
Further details can be obtained from HW Fisher & Company’s Martin Taylor or Andrew Subramaniam.
You can contact HW Fisher & Company by emailing email@example.com or visiting The HW Fisher website.
Taking care of tax — some useful tips
1. If you are just starting semi-pro or professional work, you must register with HMRC as being self-employed. Failure to do so can incur a penalty.
2. Be honest with the tax authorities. It pays in the long run. Do not think that you can fool HMRC, as a high percentage of Tax Inspectors are top class university graduates.
3. When you write a letter to the tax authorities, keep a copy for future reference.
4. Get receipts for everything that you pay out. The tax authorities is entitled to see a receipt for everything you claim for.
5. If you are in doubt about any expenses/allowances, claim them. Give the full details to the HMRC and let it decide — that is its job.
6. Do not ignore communications from the HMRC — it will not go away and can get quite nastily persistent. This will only lead to estimates of your income being made, which always ends up with you paying excessive tax.
7. Do not write nasty letters to the HMRC, even if a mistake has been made, as it will not get you anywhere. A polite letter will grant you a far more sympathetic level of consideration.
8. In spite of all you have heard about Tax Inspectors, most are very fair people. They are there to ensure that you pay the correct amount of tax — no more, no less. In case you wondered, they do not get paid commission!
9. It is well worth putting some money aside to cover your tax bills when they do arrive.
The tax laws have undergone a major overhaul recently and large chunks of legislation have been rewritten in, supposedly, more straightforward and understandable language. However, it is likely that some of the old terminology for different types of income will live on for a number of years.
This guide will concentrate on two types of income relevant to musicians. The first type is income from an employment or office — for example, as an employee of the BBC in one of the orchestras. This type of income is known as ‘earnings from employment’.
The second type of income relevant to musicians is income of self-employed people such as a self-employed musician, referred to as ‘trading income’ and includes income from trades, professions and vocations.
The potential tax saving opportunities for musicians with earnings from employment are less than for musicians with trading income, who are able to claim a wide range of expenses against their income and will generally pay any tax due twice a year through the Self Assessment system rather than having tax deducted at source by their employer.
Naturally, HM Revenue and Customs (HMRC) is keen to categorise as many people as possible as being employed rather than self-employed. The exact rules to determine the position are defined in the HMRC pamphlet, Extra Statutory Concessions (Concession A75 on p35). This pamphlet can be obtained from HMRC offices or downloaded by visiting the HMRC website.
Alternatively, you should seek professional advice.
In exceptional circumstances, some musicians may qualify for what is termed ‘Reserved Trading Income Status’ (previously known as ‘Reserved Schedule D Status’). They will continue to be taxed on income from theatrical work as self-employed so long as tax liabilities are properly discharged and there is no break in their employment.
What happens about my tax and National Insurance if I am employed?
If you are employed, your employer is responsible for deducting Income Tax and National Insurance from your salary via the PAYE system. Your employer then pays this over to HMRC on your behalf.
— The amount of Income Tax deducted from your salary is determined by using your PAYE Coding Notice. HMRC issues notices to employers to adjust the level of tax paid for any benefits you may receive, higher rate tax due on other income you receive and any relief for deductions, such as making pension payments (see p187).
— Class 1 National Insurance will be deducted from your salary at a rate of 12% on income between the lower limit of £7,748.52 and the upper limit of £41,444. An additional 2% is payable on all salary above £41,444.
— You will pay a lower rate of 10.6% National Insurance if you have opted out of the State Second Pension so you will only receive a basic state pension when you do retire.
— You may still be required to complete a tax return if your total taxable income is above the higher rate threshold and you have other income, such as bank interest or dividends. Any additional tax due would be payable on the 31 January following the end of the tax year, e.g. 31 January 2014, for the year ended 5 April 2013, with the tax return also due for filing by this date.
— As an employee you can only claim expenses against your income that are wholly, exclusively and necessarily incurred in the duties of employment and HMRC is very strict on what expenditure does qualify.
— In certain circumstances, commission paid to an agent is deductible for employees. You may wish to seek professional advice.
Class 1 National Insurance: self-employed
The Government has announced that they will repeal the current NI regulations in respect of entertainers. This means that from 6 April 2014, those individuals engaged as a singer, or musician, or in any similar performing capacity will pay Class 2 and Class 4 NI as self employed earners. The current regs meant that these individuals fell under Class 1.
What happens about my tax and National Insurance if I am self-employed?
If you are self-employed, you are responsible for your own tax and National Insurance. Even if you are paying Class 1 contributions as an employee, you have to pay Class 2 and Class 4 contributions on self-employed income, subject to profit levels. This means:
— Telling your local tax and Social Security offices you are in business by registering as self-employed. Failure to do so within the first three months of self-employment incurs a penalty, based on the contributions missed and the reasons for registering late.
— Reporting all your income to the tax office each year so that they can assess the tax due on it. Once you have registered, HMRC will send you a tax return each year.
— Paying the tax: for the first tax year in which you become self-employed you will not usually have to pay the tax due on profits until 31 January following the end of that year. Subsequently, you will then normally pay it in two instalments, on 31 January and 31 July of each year.
— Paying Class 2 National Insurance Contributions as a self-employed person, by monthly direct debit or by direct billing from the National Insurance Contributions Office (NICO, part of HMRC) on a biannual basis. The Class 2 rate is £2.70 per week. The small earnings exemption can be granted to self-employed people who have an income below the low earnings threshold of £5,725. However, they may wish to continue making the contributions in order to preserve their state benefit entitlements.
— The Class 4 contribution is currently levied at a rate of 9% on self-employed profits between £7,755 and £41,450 per annum, with an additional 2% payable on all profits above £41,450. It is assessed as part of the tax calculation and paid in the same way, at the same times. It does not increase or affect entitlements in any way. However, it may be deferred or exempted if you also have substantial employment income or are beyond state retirement age.
Being self-employed also affects:
— Your entitlement to Social Security benefits, such as unemployment benefit.
— Other rights and duties, e.g. under the Employment Protection Acts.
— Your liabilities to the public for the work you do.
You can find more information about self-employment in an HMRC booklet entitled ‘SE1 Thinking of Working For Yourself?’ which you can get free from any tax office or download from the HMRC website.