We are often asked how expenses affect your rebate, and this is just a quick guide that hopefully answers some of the most frequently asked questions.
There is nothing you buy that you get the full cost refunded for, be it a vehicle or tools, you will never receive a 100% refund of the cost of the item, even if 100% of the cost is tax-deductible.
The term 100% tax-deductible does not mean you get 100% back, it means you can claim 100% of the cost as an expense, without any private use adjustment.
In simple terms, allowable expenses reduce the total income that you need to pay tax on (taxable income), and you pay tax at 20% for basic ratepayers, so for every £100 of allowable expenses, you save £20 in tax that would have otherwise been charged.
Under no circumstances will you ever get the full value of your expenses your claiming repaid to you. If you had £5000 in expenses, you would not get £5000 back. Instead, your taxable income would be reduced by £5000.
If your taxable income reduces by £5000, you will save £1000 in tax (20% for basic ratepayers)
If you have then had more tax deducted from you than you needed to pay, then you have "overpaid" tax, and you get that overpaid amount back.
So in this example, if you had £3,000 in tax deducted from you, but after your expenses, you only owe £2,000 in tax, then you get the £1,000 tax overpaid, refunded to you.
You will never receive a 100% refund of the value of the item, even if 100% of the cost is tax-deductible. Otherwise, people would be buying new vans, new tools, new laptops and new phones every day and then get the total value of those refunded at the end of the year, essentially making those items free of charge!
Unfortunately, HMRC does not give phones, vans or tools away for free!
Throughout the year tax is deducted on your earnings, be it through self-employment as a CIS subcontractor (where tax is deducted at a standard %20 rate), or through PAYE employment (where the amount of tax you pay is adjusted throughout the year based on your income, hence the term PAYE, short for Pay As You Earn).
For this example, let's assume you have worked as a self-employed CIS subcontractor for the full tax year, earned £30000 and had tax deducted at the standard 20% rate throughout the year. In this instance you would have had a £6000 tax deduction leaving you with a £24000 total paid into your bank.
So now we deduct your outgoings/expenses from your income (gross) so gross £30000 minus expenses £10000 = £20000 (net profit)
Then we deduct the personal allowance (personal allowance is the tax-free amount that everybody is entitled to earn and rises slightly each year, for 2017/2018 it's £11500)
It's your net profit minus your personal allowance that is used to calculate how much tax and national insurance you should pay.
In this case net your net profit is £20000 (gross £30000 minus expenses of £10000) minus the personal allowance of £11500, Leaving you with a taxable income of £8500 for the year.
- Expenses £10000
- Net Profit £20000
- Personal allowance £11500
= Taxable income £8500
The tax rate for this income is 20% so you should pay £1700 tax on this income, plus the Class 4 and class 2 national insurance, leaving a total tax and national insurance payable for the year of £2913.44
As you have already had £6000 tax deducted from your pay, and you only owed £2913.44 for tax and National Insurance, you would be due a rebate of £3086.56.
So, lowering your net profit by adding in your expenses reduces your taxable amount which increases your rebate.
So now let's keep all the figures the same, but increase the expenses to £15000.
- Expenses £15000
- Net Profit £15000
- Personal allowance £11500
= Taxable income £3500
The tax rate for this income is 20% so you should pay £700 tax plus the Class 4 and class 2 national insurance, leaving a total tax and national insurance payable for the year of £1463.44
As we know you have already had £6000 Tax deducted from your pay so your rebate would be £6000 - £1650.20 tax and n.i payable = Rebate £4536.56
Lastly, let's look at an example where your gross income for the year is less than the personal allowance limit
This case is slightly different, because your total income for the year is below the allocated personal allowance limit you are already entitled to a full repayment of tax, you may still be liable to some national insurance contributions, but no tax.
Therefore, the amount you claim in expense will not affect your rebate as you already entitled to full repayment of all taxes. So, to exaggerate we have not included any expenses in the last example.
- Expenses £0
- Net Profit £8000
- Personal allowance £11500
= Taxable income £0
The tax rate for this income is 0% as it is below the personal allowance limit, so you should pay £0 tax on this income, plus the Class 4 and class 2 national insurance,leaving a total national insurance payable for the year of £148.20
As we know you have already had £1600 deducted from your pay so your rebate would be £1600 - £148.20 tax and n.i payable = rebate £1451.80
The last two points to remember are, you can't get back more tax than you have already paid, if you have paid £3000 in tax then the most Tax rebate you could ever expect to receive is £3000.
Secondly, you should never expect to get the full value of your expenses repaid to you, just because you had £5000 in expenses you would not get £5000 back, the £5000 would reduce your taxable income, Otherwise people would be buying new vans, new tools, new laptops and new phones every day and then get the total value of that repaid at the end of the year!