Tax and national insurance
There is extensive guidance on all aspects of tax, capital allowances, the treatment of Chambers’ expenses, VAT and pensions, including a section specifically providing advice to pupils and barristers starting practice, in the Bar Council’s Taxation and Retirement Benefits Guidance.
The following are some key points to bear in mind. Always take full advice, or conduct your own research with the help of the Taxation Handbook (see link above).
- It is important to register with HMRC as soon as you start practising (i.e. as soon as you are on your feet – or sitting at your desk – generating fees).
- To fill in a tax return, you need to register with HMRC. You can then fill in a paper return or an online return as you choose. HMRC will calculate what you owe and will send you the bill. Barristers pay tax in two instalments; the first in January, the second in July.
- As a self-employed practitioner your tax is paid on account in advance of the next year. This means that your first bill will be made up of your tax for the previous year, and also half of that again on account. The second payment on account of half again then falls due in July.
- From the tax year 2013/14 onwards you may elect to be taxed on either a cash basis or an earnings basis. If you are taxed on a cash basis, you will be taxed on cash received in the relevant tax year. Before you choose the cash basis read the HMRC guidance to confirm your eligibility to use it: there are amongst other things entry and exit thresholds based on the level of receipts. If you are taxed on an earnings basis your taxable profits will be the profits earned in the relevant tax year, not cash actually received. There are different, detailed rules associated with each basis of taxation: see paragraphs 36-42 of the Taxation Handbook.
- Bear in mind that you have the option of making your first six award tax free. See Study Loans and Pupillage Awards. See the Study Loans and Pupillage Awards page of the Toolkit.
When you start receiving income, we recommend setting up a separate savings account as soon as possible. As soon as you pay in a cheque, immediately transfer approximately 25% of it (after deducting the VAT element) into this account. Don’t be tempted to dip into the lump sum that’s building up in this account as you’ll need it when the tax comes to be paid. Keep an eye on the amounts in this savings account. If you seem to be accruing a surplus, you may be able to reduce your contribution to say 22% or even 20%: if the amounts saved seem a little low you may wish to up the percentage to 30% or 35%.
Premium bonds are quite a good place to put your tax savings as:
- The income is tax free
- They are accessible but not so easily accessible that you are tempted to use them for a holiday
- It’s quite exciting when you get told you have won something (even though it turns out only to be £25), and
- You might win £1m!
For deadlines and penalties, see below.
Tax deadlines and penalties
The HMRC newly self-employed helpline:
There is an HMRC helpline specifically for those newly self-employed. Phone: 0300 200 3504.
- Whilst you can fill out a paper return with an earlier deadline (31 October) a self-assessment tax return must be completed by 31 January following the end of the relevant tax year (which usually ends on the 5 April in the previous year).
- It is certainly worthwhile employing an accountant to fill this out for you – the form is not straight-forward and using an accountant is likely to increase your cash flow (by setting your accounting year end at an advantageous date), save you money (as they know what can properly be claimed) and also save you from sleepless nights (because they have filled in all the correct boxes and reminded you that you made a payment on account in July so you do not pay HMRC twice).
- This goes a fortiori for anyone who is mixing self-employed practice with employment e.g. as a judicial assistant at the Court of Appeal or the Supreme Court.
- NB if you obtain income from other sources e.g. from a property which is rented out or dividends (which carry a 10% tax credit) this will also need to be declared in your self-assessment.
- For further information see the Taxation Handbook. Income tax is dealt with from page 8.
- Payments are due on the 31 January and the 31 July each year (the July payment is on account of the next year). This is explained in detail in the Bar Council’s Taxation Handbook from paragraph 7.
- Penalties are incurred if the self-assessment is made late, the tax is paid late or the assessment is wrong and you are at fault (including negligence).
- Significant penalties should be avoided, should you ever wish to apply for judicial office.