The UK is home to a range of businesses and individuals who make income through a wide variety of sources, many of which have varying and fluctuating amounts of income. This means there is a great need to understand and manage variable and fluctuating income in the UK. This article will provide advice on how to manage such income, and how the UK tax system can help.
##Types of Variable and Fluctuating Income
Income from sources such as freelance work, self-employment, and investment income can all vary due to seasonal peaks and troughs, or even just for no apparent reason. While the income from permanent employment is generally more secure, it can still fluctuate throughout the year due to promotions, bonuses, and additional overtime hours as well.
##Tax Implications for Variable and Fluctuating Income
The UK tax system operates on a ‘pay as you earn’ basis, meaning that taxes are generally deducted automatically from wages, self-employment, and investment income as it arrives. This works well in instances where the income is consistent, however when incomes are variable and fluctuating, it can be very difficult to accurately predict the total earnings for a given tax year.
In instances where estimated income is likely to be significantly higher than the actual earnings for the tax year, it may be necessary to make a voluntary payment to avoid owing money for taxes when tax year results are calculated. It is also important to note that while certain expenses can be deducted from the taxable income, they must still be reported to the HMRC.
Planning for Unexpected Changes in Income
Having a plan in place for unpredictable rises or falls in income can be a valuable safety measure in helping to manage variable and fluctuating income in the UK. Building up an emergency fund that can be used during periods of low income can be invaluable, and can help to ensure that financial commitments are met even when income does not meet expectations.
It is also important to ensure that any debts that may be taken on are at a manageable level, so that the interest payments do not drastically reduce the potential for savings or the ability to cover unexpected costs.
Investing in Tax-Efficient Ways
When income is variable and fluctuating, it is important to be aware of the tax implications of any investments made. Tax-efficient investments, such as ISAs and pension schemes, can be a great way to ensure that any returns are not heavily impacted by the tax system.
In addition, any amounts invested can be offset against taxable income for the current tax year, potentially reducing amounts owing to the HMRC.
Seek Professional Advice
Ensuring that variable and fluctuating income is managed effectively is not always easy, and it is important to seek professional advice when necessary. An experienced financial professional can provide valuable advice and knowledge in terms of investments, tax deductions, budgeting, and other aspects of managing income.
Variable and fluctuating income can make planning for the future a complicated activity. However, by understanding the tax implications of income, planning for unexpected changes, investing in tax-efficient ways, and seeking professional advice when necessary, it is possible to successfully manage variable and fluctuating income in the UK.