Perhaps they are not telling the truth - tax has to be paid by 31st Jan, but the PLR payment doesn't come through until February. But let's assume they are, since we should take people at their word unless we have good reason not to. (Probably all the disasters in my life stem from that naive principle - no matter.)
[Note for non-UK readers: In the UK, income tax on self-employed earnings is paid in January. You have to work out what you owe on the previous year's earnings, and pay half in advance for the coming year, on the assumption that you will earn the same. You can adjust this guess if you think your earnings will be different. You pay the second half of the estimate in July. The following January, what you've already paid is deducted from what you owe. If you earn the same every year, you effectively pay half in January and half in July. If your income increases, you pay extra in January as there's a catch-up payment.]
What's so wrong with using PLR to pay your tax? Two things - firstly, it's unpredictable. You never know how much your will get. It's worked out by tracking loans at a sample of libraries and extrapolating. Much more importantly, though, you shouldn't have to! Why ON EARTH are these writers not setting aside the tax on their earnings as they get paid? It is the ONLY sensible way to be a self-employed person. You put the tax in a deposit account and you don't touch it, NO MATTER WHAT.
Some authors have other jobs, and their personal allowance (the amount you can earn without paying tax) is used up on their employed earnings. So they need to set aside 22% (or 40%, depending on their income level) of their income from writing. That's really easy - no hard sums at all. Those of us who earn only from writing have a rather more complex calculation to do, but you can create a spreadsheet to work it out for you, and as a guideline if you set aside 25% of everything (so ignore the personal allowance) you will have about enough. If you expect to be paying higher rate tax, set aside 30-33% of everything, depending on how far over the 40% threshold you expect to go.
Yes, you have expenses to deduct - don't worry about it. You also have NI to pay. You might get some money left over in your tax account at the end - and the first time you can use that to make the advance payment. After a few years, you can afford to take out some of the excess and spend it. But not immediately.
And finally - the figures don't work. The amount of PLR you can earn is capped at £6,600, and this year (2010-11), 263 authors earned the maximum. Now, if you're earning £6,600 in PLR you are earning a lot from your books - your tax bill is going to be a LOT more than £6,600. Actually, it would be interesting to compare tax bills and PLR income: ignoring payments on account, my PLR this year is around an eighth of my tax liability - so it wouldn't be a lot of help. Most PLR payments (nearly 15,000 out of a total of 23,000) are for under £50, so that's not going to go far in anyone's tax bill. I assume, though, that these trifling payments aren't going to professional authors but to people who've written the odd one or two books, probably some time ago, and maybe on obscure topics.
Authors manage to look unprofessional enough - let's not look extra-unprofessional by screwing up our tax accounts, or even pretending to. It's not cool to adopt an 'I can't deal with accounts' pose, it just makes you look incompetent. If I were a publisher, I'd be wary of commissioning someone who doesn't have the sense to set their tax aside - they probably won't take deadlines seriously either. After all, tax doesn't come as a surprise! It's not as though you just landed on Go to Jail - you always knew it was coming. And while flights of fancy and working outside the rules may be essential to your creative work, there's a lot of uncreative work involved in being a professional writer, and you need your feet on the ground for that part.
OK, rant over. You can all rant back at me now :-)
Stroppy, I quite agree. And you make good, clear points. I have *one* quibble. You say "Now, if you're earning £6,600 in PLR you are earning a lot from your books - your tax bill is going to be a LOT more than £6,600." Not necessarily. It's possible for a writer to be doing very well on library borrowings without having had any advance or royalties that year. I have a friend who earned more from PLR than she did from direct advance/royalties last year. I do agree that it's unlikely, and also (as you say) most authors don't earn anything like that £6,000 PLR ceiling, but I do think it's less and less rare for a writer to earn more from PLR than from advances. Don't you think?ReplyDelete
Yes, you're right, Nicola. In general, someone earning £6600 in PLR will have a substantial income from their books. But in the case you cite, if they don't make any other money the £6,600 won't put them over the tax threshold anyway (or only by about 5p). In that case, they could use the PLR from one year to pay the tax bill on the previous year. But it would still be more sensible to set it aside the year they get it - you can't rely on PLR!ReplyDelete
I would think that a lot of the 'I am using my PLR to pay my taxes' are comments into which you must factor wry humour and leeway and not take it as literal. Taxes fall due 31st Jan and the money has to come from income. Hopefully most sane authors will have that money already set aside, but when the PLR comes in, it helps to replace the depleted reservoir, so in an oblique way, PLR does pay or help pay the taxes. I have earned the full amount this year, but owing to the vagaries of the tax system (and I earn a good full time living as a writer), my PLR will pay my January tax bill (or refill the sump) and leave me enough for a large bar of chocolate (but last year's tax bill made my eyes water! I paid the latter with money costed in and used my full PLR payment to pay the household bills and eat for a few months.ReplyDelete
Another fabulous post, as ever. You're quite right. I scrupulously put aside a third of my earnings as soon as they come in so that the money is always there for my tax bill. I am flakey in many ways, but I have an inbuilt fear of the tax man and I am aware of my own money weaknesses. If I don't put the money aside immediately, it will get spent.ReplyDelete
Yes, I too put aside a third as soon as the money comes in, plus all the VAT so that I don't get nasty surprises in January or July.ReplyDelete
I also have been amazed by all the PLR=Tax comments but here's another that you WON'T agree with. Why are all these people only calculating their tax in January?
I do mine as soon as possibly after 5th April (though it was July this year) so that I know what I have to pay.
That half thing? I don't do that. I pay a year in arrears, so I pay the full amount every year on the previous year's earnings.ReplyDelete
I do pay an accountant, and he's so worth the money.
When I started earning proper money from writing, I used to stash the tax money safely away in Premium Bonds so I couldn't be tempted to get at it. My accountant used to laugh at me but he soon stopped when I won £1,700 in a few months. And that's tax free... I still think it's a good idea (esp as there's not really any such thing as a high interest savings a/c these days) and there's always the chance of winning a million. A fiver on the odd horse is quite handy too, so long as they're not slow ones. Sadly, my PLR ends up paying for the Christmas Amex and the gas bill.ReplyDelete
Lynne - as I understand it, I think you *do* do that half thing. Because that's what HMRC makes us do (except if we do averaging.) We pay half "on account", woprked out as per Anne's computations, ie based on what we earned the year before and assuming we're going to do at least as well next year. Pfffth to that, I say!ReplyDelete
Since the interest rate is ridiculous, I put my tax money in premium bonds too, Judy. Over the years I've made nearly £2000 in mini wins, because, of course, once they're in Bonds I can't bear to cash them and, fortunately, so far, my tax bill has been met from income. But the money is there!ReplyDelete
Yes, I have the tax money in premium bonds, too. It wins a few hundred every year, which is probably more than I'd get in interest.ReplyDelete
Lynne, as Nicola says, I don't there is an option NOT to do the 'half thing' -that's just how the British tax system works if you're self-employed. You pay in arrears for the year just gone and make payments on account for the current/following year. You can reduce your payments on account by giving a reason why your income will be lower in the current year than the last year (but if you kept doing it and it wasn't lower, I think they'd complain).
I'm with the Book Maven. Do your tax return as soon as you can. And put the money aside for everything you earn!ReplyDelete
I am chastened, Adele and Book Maven. But I no longer do it on 31st Jan. Then again, I *do* it as soon as I can - it just takes me 9 months to psyche myself up to doing it because it is boring! (But the money is put aside.)ReplyDelete
I have to confess that I married one of Nature's best accountants! So it's not down to me, this super-efficiency, I assure you. He's also one of the world's best bibliographers!ReplyDelete
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the day all writers in the UK can find out how much they've earned in Public Lending Rights. commercialistiReplyDelete
If your preferred system guarantees a $1000 every evening, you should be how to make money creating every evening. I had tried many different applications over the decades, and no issue how difficult I tried, I couldn't copy any of the applications.ReplyDelete