Self-employed tax advice

If you work for yourself, and you don’t use a limited company, then you will be self-employed and are likely to pay self employed income tax. Sometimes this is referred to as being a sole trader (it means the same thing).

If you are self-employed, it means you are responsible for sorting out your own tax returns and National Insurance Contributions.

You need to register with H M Revenue and Customs as self-employed. You can access get details from their website at http://www.hmrc.gov.uk/selfemployed/register-selfemp.htm. Note that there can be financial penalties if you don’t register with them.

Once you are set up on the system, there are three things you have to pay:

• Class 2 National Insurance Contributions, currently at £2.40 a week. This gets you limited state pension rights when you retire. It is normally collected by direct debit.

• Income Tax, which you have to pay in January and July in lump sums.

• Class 4 National Insurance Contributions, which are charged like tax (and paid with your tax) as an extra amount to be included in your January and July payments.

In addition you may have to register for VAT. If your turnover goes above £68,000 in a 12-month period (you need to review this on a rolling 12-month basis, not just once a year) you have to register unless you are supplying exempt goods or services. If you aren’t sure what is exempt and what is taxable, you should speak to an accountant who can give you tax advice for the self employed.

Your Income Tax and Class 4 National Insurance Contributions are charged on your profits. In order to be able to work out your profits you will need to keep a record of a number of things: You will need to record your turnover, ie your total sales figures. In tax terms you make a sale when you deliver your goods or do the job you will get paid for, and not when you get paid (which is often later) and so you need to remember to include sales you’ve not got paid for yet in your figures. If you don’t keep good enough records of your turnover, then again you can get financial penalties if the tax authorities

You can deduct your business expenses. Some expenses will be obvious (such as the cost of the goods you sell, or consumable items you use in your work). There are lots of things that you can’t claim as expenses though: normal living expenses won’t count, including food, clothing and costs of your home — although if you run your business from home, some domestic costs may be allowed. There are some (such as business mileage in your own vehicle) where the rules are complicated and you would be best advised to contact an accountant for small business tax advice.

The tax year runs from 6 April to the following 5 April. Some businesses do their first set of figures to the 5 April following the date they started, and then do 12-month sets of figures tying in with the tax year afterwards. But you don’t have to have your figures done to tie in with the tax year, and so many more businesses pick a different date, and they draw up their figures to that other date every year. But having your business year out of step with the tax year is more complicated and again you would be best getting advice from an accountant.

Gerry Jackson