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Make sure you check the tax consequences of getting extra income

My recurring nightmare is finding myself in the present day but in fact not having passed all my professional exams, and having one more exam to pass and not having done any revision for it.

One of my business partners, Stuart has a similar nightmare. He is on the underground travelling to the examination centre, but the train is not stopping at any station - it just keeps going round and round.

I was reminded of Stuart's nightmare when I met a client this week. Not in the context of London's transportation system, but with his tax.

This client had recently paid for his daughters wedding and had used up £20,000 of his resources, and decided he wanted replace these savings. The choices are: beg, steal or borrow... Or work.

The client chose the latter and putting aside enough to pay the tax, worked an extra £30,000 of locum sessions. I met this client this week and explained the tax position on this.

40% tax on the £30,000 comes to £12,000. Since this was earned up to 31 March 2011, it will be due on 31 January 2012. HMRC will expect 50% of this as a payment on account for the next tax year, which is also due on 31 January 2012, and the remaining £6,000.

Since this income is superannuable, there is 8.5% pension contribution to pay, but since this is tax deductible the real cost will be 5.1% which works out at £1,530.

Class 4 NIC adds another £600 so my client having earned £30,000 has only replaced £9,870 of his £20,000 and is seriously miffed. My comments that it would have been so much worse had he been paying tax at 50% with just £5,370 left did not seem to pacify him.

So we go back to his original options, begging, borrowing or stealing. The latter is not an option, borrowing is harder than ever, and begging, well it is just unseemly. But if you want to work your way out of trouble, check out the tax consequences in advance, you may get a nasty surprise!

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