You will set a percentage of every client payment to move into your tax and MediSave pot.
In module 1 you used a placeholder of 15% for the tax and MediSave pot. It was a guess, and guesses go wrong in both directions. Set it too low and the pot runs short when the bills come. Set it too high and you starve your holding account for no reason, which can make base pay look unaffordable when it is fine. This exercise replaces the guess with a percentage you worked out from your own figures.
You need your invoices for this year so far, a rough view of the work coming in, your business expenses, the CPF Board's MediSave contribution table and the tax calculator on the IRAS website. Set aside about twenty-five minutes.
Start with gross income. Add up what you have invoiced this year so far, then add an honest estimate for the rest of the year. Base the estimate on work you have agreed and on what the same months brought last year. Leave out work you only hope for.
Then subtract your expected business expenses and capital allowances for the year. Lesson 4.2 covers what counts. If you have not sorted your expenses yet, last year's total is a reasonable stand-in.
Mei, with figures made up for the example, has invoiced S$30,000 by the end of June. Based on her bookings and last year's second half, she expects another S$32,000. That gives an expected gross income of S$62,000. Her expenses and capital allowances should come to about S$3,600, so her estimated net trade income is S$62,000 minus S$3,600, which is S$58,400.
For MediSave, open the CPF Board table and find the rate or formula for your age and estimated net trade income, as you did in lesson 2.2. Mei uses the same made-up example rate of 9%. S$58,400 multiplied by 9% is S$5,256, which she rounds up to S$5,300.
For income tax, use the calculator on the IRAS website. Enter your estimated trade income, any other income, and the reliefs you expect to claim. Tax reliefs are a subject of their own, covered in Tax & Reliefs, so for now enter only the ones you are sure of. Suppose the calculator gives Mei a tax estimate of S$1,300. That figure is an example, not what the calculator will show you.
Her total is S$5,300 plus S$1,300, which is S$6,600.
Divide the total by your expected gross income, not your net income. The share moves to the pot as each gross payment arrives, so it has to be a percentage of gross.
For Mei, S$6,600 divided by S$62,000 is about 10.6%. She rounds up to 11%. Rounding up gives a margin for an estimate that turns out low, and a pot that ends the year with a little left over is a much easier problem than one that falls short.
Her placeholder of 15% was too high. Switching to 11% means 4% more of each payment stays in her holding account, and her back test from lesson 1.4 now has more room than she thought.
Your result could go the other way. If your income is higher or your expenses lower, the percentage can come out above 15%, and that is useful to know now rather than when the notices arrive.
A percentage set in June rests on a guess about the next six months. Each quarter, update your estimate of gross income with what actually came in, rerun the two estimates, and check the percentage again. Module 8 builds this into your quarterly review.
Check the pot balance too. By the end of the year, the pot should hold roughly your full estimate for the year's tax and MediSave. If it is falling behind, raise the percentage for the rest of the year rather than waiting for the bills.
If this is your first year as a self-employed person, watch for one trap. The pot you build this year is for this year's bills, which arrive next year. Last year's bills may land in the meantime, and you never set anything aside for those. Plan for them separately, with a MediSave instalment plan if your notice allows one, and do not take them from this year's pot.
The worksheet ends with six lines: estimated gross income, estimated expenses and capital allowances, estimated net trade income, estimated MediSave, estimated income tax, and the set-aside percentage. Mei's reads S$62,000, S$3,600, S$58,400, S$5,300, S$1,300 and 11%.
One more line turns the worksheet into a habit: the date you will start moving the new percentage. The answer should be your next client payment. Have this year's invoices open beside the IRAS calculator, and work through the six lines in the activity.
Complete the set-aside worksheet and write the percentage of each payment you will move into the pot from today.
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