Andrew Warwick-Thompson answers your questions. Q
During the past year I have been giving maths lessons to a friend's child, a Pounds 10-an-hour extra-curricular activity that has earned me perhaps Pounds 150 - money I have used for little "treats". Now, however, two other parents have asked me to tutor their children on a weekly basis. I'm tempted to say "yes" but worried about the tax position. Does the Inland Revenue require you to declare absolutely everything that you earn (even if you are paid in kind - bottles of wine etc)? And if it does, is there any way of avoiding paying the full tax on this income? Can you reduce your tax liability by, for example, setting up a tutorial company similar to those that advertise in local newspapers?
The Revenue does require you to declare everything, including benefits in kind, so unless your income is covered by your personal allowance you will have to pay income tax. To avoid some of the tax, you could consider paying contributions to a personal pension plan, on which you will obtain tax relief. However, the allowable contributions in your case are probably below the minimum contribution for most plans, usually about Pounds 30 per month.
You should also note that any expenses you incur in respect of your tutorial work, eg travel, textbooks and other material, can be offset against the income from that work to determine how much will be subject to tax.
A tutorial company would not be tax-efficient. It would probably not pay corporation tax, but the salary or dividends if paid to you would be subject to income tax and a salary might also attract employers' and employees' National Insurance contributions.
Andrew Warwick-Thompson is a lawyer who works for Bacon and Woodrow, the international firm of actuaries and consultants. Readers who wish to put questions to him (no names will be published) should write to: Personal Finance Desk, The TES, 66-68 East Smithfield, London E1 9XY (fax 071 782 3200). No personal correspondence will be entered into, and no legal liability will be accepted for the advice offered.