Tax Guide for Professional Musicians
Unless you either turn out to be a total failure, or decide that you can live on earnings of less than £8,000 a year, you are going to end up paying tax at some time in your life. Obviously, it’s far better to get everything organised now, rather than waiting until later when it may be too late: the problem won’t go away, and many young musicians get themselves into a terrible mess by trying to ignore the whole issue until HM Revenue & Customs catches up with them. This article will give you some information about the workings of income tax and national insurance, and will also help you to deal with the problems that you are most likely to meet during your first few years in the music profession.
What is taxable?
Anyone can earn, during the tax year ending on 5th April 2013, £8,105 without paying any tax. There are no special tax rules for students, and if you are earning more than this annual personal allowance, you will pay tax the same as anyone else. Certain types of income are not taxable, including grants and scholarships, gifts, council tax benefit and housing benefit, and money which you inherit. Bank and building society interest is taxable, and the tax is usually deducted at source before the interest is paid out. If your earnings are less than the annual personal allowance, you can fill in a form to give to your bank or building society, certifying that you are not a tax-payer, and you can also reclaim any tax taken off in previous years. Jobseeker’s Allowance is taxable too, and it will be added to your earnings to work out if you have to pay tax. Once your earnings go above the £8,105 personal allowance level, the next £34,370 of your income is taxable at 20%. There are higher rates for people earning more than £42,475, but they aren’t likely to be relevant to many musicians at the start of their careers . . .
Employment and self employment
You are employed if you have a job and if you have an employer. Normally, you will be paid a regular salary, and you will be required to work at your employer’s place of business. You may be employed as a member of an orchestra or opera chorus, as a teacher at a school, or as an administrator in an office. Employed musicians are taxed at source, and this will be the case if you are employed full-time or part-time. Tax is deducted by the employer under the Pay As You Earn (PAYE) scheme, after referring to a code number issued by the tax office which tells the employer how to work out the tax deductions. At the end of the tax year (5th April), HM Revenue & Customs checks the figures and, in the unlikely event of there being a mistake, will repay any tax overpaid, or charge extra tax in the following year if not enough has been collected. In this way, the employer effectively becomes a tax collector, and the employee doesn’t even see the money before it is whisked away to the local tax office. In normal circumstances, no expenses can be deducted before the tax is calculated: only expenses which, if not incurred, would prevent the employee working (the law says ‘wholly, exclusively and necessarily’) can be claimed (for example, strings for an orchestral violinist). Travel to and from work is not allowable as a tax expense, and the tax office will not even allow the cost of purchasing and maintaining an instrument for a music teacher (although the position would be different if the teacher was also required to give demonstration recitals or to play in a staff orchestra).
You are self-employed if you are working for yourself. Typically, this will mean freelancing and/or giving private lessons to your own pupils. You have no regular salary, and only earn money when work comes in. Some of the major London orchestras engage all their musicians on a selfemployed basis, which means that the players just get paid for the work they do – and, if the orchestra has no work, then no one gets paid anything. You will discover that there are three major differences between the system used for taxing employed people and the method under which you will be taxed if you are self employed. First, since you are probably working for more than one person, no single employer can be asked to deal with the tax deductions and so PAYE cannot be operated; second, your tax office doesn’t know how much you have earned until you send in your figures after the end of your accounting year; third, all your business expenses can be deducted from your income, so that you are taxed on profit rather than on earnings. Accounts detailing your earnings and expenses have to be prepared once a year, and the tax you pay is based on these figures. It is extremely important to keep full records of all your earnings and expenses, and also your payslips and receipts, bank statements and cheque books – there is a fine of up to £3,000 for failing to keep evidence of your business income and outgoings.
Since your tax can’t be worked out until after the end of your financial year, there can be a considerable gap between earning fees and paying the tax on them. This has one advantage, and one disadvantage: you receive your earnings in full and have use of the money, even if some of it will later have to be paid to HM Revenue & Customs; if, however, a good year is followed by a year in which your earnings are low, you will have to pay the heavy tax bill from the good year when there is little cash around. This means that you must save for tax as you earn – it’s not much use telling the tax office that you can’t pay your tax bill because you’ve spent the money or because the fixer who was engaging you has gone out of business . . .
Tax for most self-employed people is payable annually in two instalments – on 31st January (just after Christmas, when you can’t afford it), and on 31st July (just when you were thinking about taking a summer holiday). Because of the way the tax legislation works (and there isn’t room to go into detail here), the January payment is often the larger of the two.
Expenses when you’re self employed
The biggest advantage in being self-employed is that all expenses incurred in being a professional musician can be deducted from your earnings before your taxable income is worked out. The ‘necessarily’ rule, which prevents employed people claiming most expenses, doesn’t apply, and the Revenue can only challenge whether or not an expense is really business-related – hence the regular arguments about such things as hairdressing and concert tickets. The expense does not have to be sensible – you could claim for buying five pianos; the price does not have to be reasonable – a tails suit trimmed with sequins costing £5,000 would have to be allowed, provided you could persuade a concert promoter to let you wear it.
There is, therefore, no approved list of allowable expenses, but the following are the most commonly claimed:
Music, scores and music books
CDs and DVDs
Instrument repairs, strings, reeds and tuning
Payments to deputies
Fees paid to an accompanist or coach
Hotels and meals
Hairdressing and make-up
Laundry and dry cleaning
Telephone (including your landline, mobile and payphones)
Answering or diary service
Internet and e-mail
Postage and stationery
Advertising and publicity (including website design and web-hosting)
Professional and union subscriptions
Music journals and magazines
Courses and conferences
Studio costs (either renting a studio, or maintaining a music room at home, in which case a proportion of your rent, mortgage interest, council tax, heat and light can be claimed)
Your car expenses and your telephone bills will include some private use, and your tax inspector will expect you to deduct a percentage of the totals to allow for this. The claim for concert clothes must only include items which are not suitable for everyday wear: a suit or a dress for auditions or for teaching won’t usually be accepted. The rule for claiming the cost of meals is rather vague, but most tax inspectors will only allow meals taken when working away from home overnight. Insurance on instruments is obviously claimable, but it is also worth claiming a proportion of your house or flat contents insurance, since this will cover your music and books, your concert clothes, your audio equipment, and so on.
A claim for using a room as a music studio or an office will be accepted if you are teaching at home, if you are practising at home, or even if you are just keeping your diary and preparing your accounts at home – you are running a business from your private address, and you are therefore using more gas and electricity than would otherwise be the case, and you might well be obliged to rent or buy larger accommodation. If you are paying rent, mortgage interest or council tax, a proportion of these costs will also be allowable.
In addition to all these day-to-day expenses (called ‘revenue’ expenses), the cost of equipment can be claimed. This ‘capital’ expenditure will include instruments, audio equipment (only a percentage is usually accepted), office equipment (answering machine, filing cabinet, computer, etc), means of transport (usually a car, but a bicycle or motorbike is OK, if used for business purposes) – in other words, anything with a potential resale value. Equipment purchased or given to you before you became self-employed counts: you are allowed to claim the value on the day your business starts (so instruments owned while a student can be included). Instruments given to you after your self-employment has started can also be claimed as though you had purchased them yourself – the argument being that you would have sold them unless you were a musician, and so you have effectively spent the money on your business. If you receive assistance from a charity to buy an instrument, the money paid to you may well not be taxable, and you will still be able to claim the full cost of the instrument.
The method of claiming for equipment is called ‘capital allowances’. Under the present regulations, new equipment costing up to £25,000 can be deducted from your profits in any one tax year. However, you can choose not to claim in the year of purchase (if, for example, your taxable profit is already below the tax threshold), or you can claim just enough to bring your income down to a level where there is no tax to pay. In both cases, the unused costs can be carried forward and used in later years. If you choose to delay the claim, you then have to spread the cost over a number of years by claiming a maximum of 18% each year until the cost is used up. If an item of equipment is sold, tax will be payable on the sale price if the whole cost has been claimed against profits, or only on the amount claimed so far if not all of the cost has been used up, but the sale price on which tax is payable can never be more than the original cost of the item, so any profit is effectively free of income tax (although you may run into problems with capital gains tax for really expensive instruments).
It is common to be taxed as employed and self employed at the same time. If, for example, you are a freelance musician but you also teach in a school, the tax office will usually consider you to be an employee of the school, even if you are only engaged on a part-time basis. There is little point telling the school bursar that you are self-employed – if he has been told to deduct tax, he has to do so, unless he receives a specific instruction from the school’s own tax inspector. If tax is deducted at source, however, it will then be allowed against your total tax bill for the year and, if it turns out that you have not earned enough to pay tax, it will be repaid to you (although you may well have to write to the tax office before they will get around to sending you a cheque). Having some of your earnings taxed at source doesn’t mean you will pay much more tax, although you will, of course, pay some of it earlier. You can’t, however, claim expenses against this employed work, although this is likely to make only a small difference to the expenses that the Revenue will allow you to claim, unless income from employment is considerable: most of your expenses can still be claimed against your freelance income.
It is vital to keep accurate records if you are self-employed. Not only are you legally obliged to keep full information about your finances, but it will also be very hard to prove the figures in your accounts without being able to produce good records if you are asked to do so by your tax inspector. Also, of course, it will be well nigh impossible to prepare accurate accounts if the records are incomplete. Remember that it is easy to work out your earnings – from payslips, bank statements, paying-in books, diaries, etc – but it can be very hard to remember expenses in detail, and musicians whose accounting records are poor almost always end up paying far too much tax, simply because their expenses claims are incomplete. Get receipts for expenses whenever possible, but losing a receipt doesn’t mean that you can’t claim the expense. Receipts also help you remember what you have bought – going into a stationers and spending £10 in cash on paper and envelopes is hardly a memorable event, and could easily be forgotten; if you have a receipt, however, it will eventually turn up in your pocket and will remind you to claim it.
All that is needed to keep the tax office happy is a simple cash book with money received listed on one side and money paid out listed on the other. You can, of course, set this up on your computer with an Excel spreadsheet, but do remember to keep a backup. Receipts and payslips should be filed in order. For earnings, the total fee must be declared (including any expenses paid to you), and you will then claim the expenses actually paid out by recording them on the outgoings side of your accounts book. If you manage to make a profit on expenses paid to you, you are taxed on it; if you spend more than you are paid (by staying in an expensive hotel, for example), your tax bill is correspondingly lower. If tax or national insurance are deducted by an engager, enter the gross amount that you should have been paid in your book, and make a note about the deductions.
How it all works
Let’s assume that you are self-employed, with an accountant looking after your affairs. There is a fairly well-established pattern that you will follow:
At the end of your accounts year, having checked that your account book is up to date and your receipts and payslips are filed in order, you will send the whole lot to your accountant. He will then prepare a ‘draft’ set of accounts from this information, which he will send to you, together with any queries he may have (Did you really only pay two telephone bills? Could you send us your new loan agreement? How much was your car insurance?). You will check through the draft figures, and will answer your accountant’s queries, and he will then be able to prepare the final accounts (which are also useful if you are applying for a bank loan or a mortgage). Your accountant will also prepare your tax computations, which will include your capital allowances calculations and any proposed adjustments for non-business use of expenses claimed in the accounts, and will let you know how much tax to pay.
The Revenue will require you to complete a Tax Return once a year. This is a statement of all your income and expenses for the year which ends on 5th April, together with a claim for your various allowances. Tax Returns are sent out in April, and your accountant, if you have one, will complete it for you. It will include not only information about your work as a musician, but also details of any other income you may have (bank account interest, share dividends, etc), together with claims for any special tax allowances to which you may be entitled. The completed return must be sent back to the Revenue by 31st January. If the return is submitted after the end of January, there is an automatic £100 fine.
While this has been going on, you will have been keeping records for the following year’s accounts, and there is a very good chance that, just as you have agreed your tax bill for the first year, it will be time for the whole procedure to start all over again . . .
If you are becoming self employed, it is important to register with HM Revenue & Customs promptly – there is a £100 fine if you fail to notify your self employment within three months of starting (although this will be waived if your earnings are below the national insurance threshold, currently £5,595 a year).
You can, of course, deal with your tax registration yourself. This will give you a tax reference, and will also get your national insurance contributions started. Simply go to the Revenue’s website at www.hmrc.gov.uk and click on the Self-employed link in the Individuals & Employees box. Alternatively, you can telephone the Self Employment Registration Line on 0845 915 4515 and say that you have recently become self-employed and would like to register with them. You will be sent a form which will ask you a number of simple questions (name, address, national insurance number, etc). Once you have sent in your registration form, you should be sent a notification of your tax reference. If it hasn’t arrived within six weeks or so, telephone the tax office to check that they haven’t lost your application.
Don’t try to pay less tax than you should by falsifying your accounts. Declare all money received, whether in cash or by cheque – being paid in cash doesn’t mean that the Revenue won’t go to the employer later and ask for a list of musicians who were engaged. Your tax inspector can ask to see your teaching diary, and can contact your private pupils and require them to swear under oath to the number of lessons they have paid you for. If you claim expenses you haven’t incurred, your accounts will look unrealistic, and you may find yourself cornered by a bright tax inspector who has noticed that, on a declared income of only £15,000, you have managed to buy a new car, rent a flat for £300 a week, pay off an old overdraft, and accumulate £2,000 in a savings account – the Revenue look at your life-style, not just your business activities.
National insurance contributions
You will, as mentioned above, also have to pay national insurance. If you are an employee, you will pay class 1 contributions, based on the amount you earn, and these contributions will be deducted from your salary under the PAYE scheme.
Self-employed people pay a class 2 contribution (currently £2.65 a week), and also an earnings-related contribution – called class 4 – which is 9% of profits above £7,605 at the moment. If, however, your freelance earnings are below £5,595, you can claim exemption from paying contributions altogether. The National Insurance Contributions Office in Newcastle-upon-Tyne can provide the necessary forms, or go to the Revenue’s website where they can be downloaded. If you find that national insurance is deducted from your freelance earnings, you can get credit to avoid paying contributions on the same income twice: there is a special box in the self employment pages of your Tax Return for claiming relief where national insurance has been deducted in this way.
If you are to be self-employed, you will almost certainly need an accountant. Whilst anyone can prepare a simple set of accounts, you will definitely require advice in the early years (remembering that there are special rules for setting up a new business). Also, knowing how to play the rules to your advantage can save thousands of pounds. In the case of a dispute, an accountant is in a far better position to argue with your tax inspector than you are, and he or she will also know how to deal with incorrect tax demands, slow repayments, and all the usual muddles that the Revenue manages to create.
Having said all this, it is not easy to find a good, and reasonably-priced, accountant. If your accountant knows little or nothing about the music profession, he is unlikely to be able to advise you on what you can and can’t claim, and he won’t be familiar with the various orchestras, opera companies, etc for whom you may work. If you go to a big City firm, you will almost certainly be looked after by a junior member of staff (even though you may be ushered into the presence of a partner at your first meeting), and will pay a fortune for the privilege. Unfortunately, some accountants think of self-employed individuals as a quick way of making easy money, so make sure your accountant is prepared to spend time helping you, rather than just producing accounts as fast as possible without asking you any questions. If you don’t receive replies to correspondence, if you don’t get a response to messages, if someone different deals with you every time you telephone, if you keep finding mistakes, or if your bill seems high for no good reason, go somewhere else. Above all, remember that you are employing your accountant, and that he needs you more than you need him.
The ideal accountant works for a small or medium-sized firm, knows the music profession, and takes a genuine personal interest in saving you money. Needles can be found in haystacks.
Tax Guide for Professional Musicians
by Trevor Ford FRSCM ARAM HonRCM HonRCO FRSA DipRAM. Trevor Ford is an Associate of the Royal Academy of Music in 1992, an Honorary Member of the Royal College of Organists in 2001, an Honorary Member of the Royal College of Music in 2008, and a Fellow of the Royal School of Church Music in 2010. He is also a Fellow of the Royal Society of Arts. He has extensive experience as a professional musician and as a senior executive manager. He is widely recognised as an expert accountant for professional musicians and ensembles.