A Guide To Being Self Employed – by Dafydd Jones, Director of OBP.
More of us are becoming self-employed with government figures showing the number of people who are self-employed rising from 3.3 million or 12% of the labour force in 2001 to 4.8 million or 15.1% in 2017.
The benefits of working for yourself include:
Being your own boss.
Work when you want to work.
Earn money for yourself and not somebody else.
However, if you are self-employed or are considering becoming self-employed it is important to consider the specific tax implications. You must gain the correct and accurate advice to ensure that you don’t end up working for yourself and then suddenly being landed with huge tax demands that may put a strain on your financial situation.
The simplest way of working for yourself is by running a business as a sole trader. When you are Self-Employed or a sole trader you’re not treated as ‘employed’ as you work for yourself and keep all the profits. However, this also means you are liable to arrange your tax affairs, register yourself with HMRC and pay any taxes due on time. You will also be personally liable for any other debt incurred in the business.
To become a sole trader, you’ll need to register with HMRC within three months of the month in which you started your self-employment. You will need to create a Government Gateway account and then complete the registration form. You’ll then have to keep accurate, up-to-date records of your income and expenditure.
You need to set yourself up as self-employed if you earned more than £1,000 from self-employment between 6 April 2017 and 5 April 2018. If you want to make voluntary Class 2 National Insurance contributions (NIC) to help you qualify for benefits you will also need to register.
You must file your Self-Assessment tax return by 31 January every year and you will also have to make payments to HMRC on 31 January of each year and maybe also make payments on 31 July of each year (if your annual tax liability is greater than £1,000).
You can register with HMRC by following the attached link:
The amount of income tax you pay is dependent on your profits. The basic rate of tax is currently 20% which is charged on any taxable profits between £11,501 and £45,000. The rate goes up to 40% on profits above £45,001 and to 45% on profits above £150,001
National Insurance Tax
The self-employed pay Class 2 NIC at a rate £2.95 per week and Class 4 which is based on your profits above £8,420. Class 4 NIC is charged at 9% on profits above £8,420 and then 2% profits on profits above £46,350.
Value Added Tax VAT
You must register for VAT if your turnover is over £85,000 over a 12-month period. Some trades may be exempt from VAT or do not have to charge for VAT on their sales and you will need further advice if you believe this applies to you. Alternatively, you may choose to voluntarily register for VAT to claim the VAT back on your expenses.
There are several VAT schemes available to ease the administrative burden of preparing your VAT return. Some of these may also be financially advantageous to you.
However, be aware that there will be a change to the way return are submitted to HMRC in April 2019. VAT records will need to be kept digitally and returns will need to be sent from Making Tax Digital compliant software.
Minimising your tax liability
There are various ways of minimising our tax liability and it is essential to get advice from a qualified person and not be too cheeky! Pushing your luck with HMRC could result in an investigation, which is costly and time consuming for any business.
Depending on your business you may be able to claim for:
- Certain car costs;
- Working from home;
- Computer hardware and software;
- Professional fees and professional subscriptions;
- Telephone costs;
- Marketing costs; and
- Purchasing capital assets such as plant and machinery.
As well as making NIC contributions to receive a state pension you may also want to put some further money aside for your retirement. This can also create further tax savings. If you are self-employed there are different types of pension you can choose from:
- Ordinary pension from the marketplace;
- Stakeholder pension (maximum charge no higher than 1.5%);
- Self-Invested Personal Pension that offer wider range of investment options but subsequently have higher charges;
- National Employment Savings Trust (NEST). This is the workplace pension scheme set up by the government for auto-enrolment.
Pensions can get quite complicated and we would advise you to contact your Independent Financial Advisor to discuss the risks and benefits of each type of investment.
You may be able to claim tax credits if you are self-employed. This might be especially so if you are just getting your business off the ground. You can also claim Maternity Allowance if you have paid Class 2 NIC or if you have Small Earnings Exception for at least 26 of the 66 weeks up to and including the week before you are expected to give birth.
If you stop being self-employed you also need to contact HMRC to ensure you do not suffer further penalties and ensure your tax affairs are dealt with properly. There may even be a tax rebate to recover from previous payments made on account or if losses have been incurred.
Other work Options
There are other ways you can work for yourself that have their own benefits and disadvantages. These ways of working for yourself will have different tax or other commercial implications. For example, some of your prospective customers/clients might say they will only work with you if you trade as a limited company.
The main types of entities and a VERY brief description of what these are listed below:
Partnership. These have similar taxation rules to the sole trader but the business is shared.
Limited Company. The taxation legislation might be more beneficial but there is also increased administration and paperwork to be completed.
Limited Liability Partnership. This is a mixture of the above two.
It is important you receive advice on how you trade and you understand the compliance needs of trading through such a vehicle.
We are always happy to guide through this minefield of options that are available to you to make sure you start a new business venture on the right track and maybe change the way you trade as you grow your business.