The Tax Advantages of Self-Employment
This helpsheet gives you an outline of what it means to work for yourself as a self-employed person. There are a number of advantages of being self-employed, but you must also comply with various regulations including the tax law.
Form of Your Business
When you decide to work for yourself you need to choose which form your business will take. The most common forms of business are:
- Sole-trader - you run the business on your own, usually under your own name;
- Partnership - you and one or more other people jointly run the business;
- Limited liability partnership - a special type of partnership that gives you and the other business owners more protection from creditors;
- Limited company - an organisation that you own and control, which carries out the business on your behalf.
If you run your business as a sole-trader or as a partnership you are legally self-employed.
When you choose to run your business as a limited company you will normally be a director and an employee of that company. You will be employed rather than self-employed, but in practice you will work for your own business.
It is important to understand the difference between being employed by your own company, and being self-employed, as it will affect the tax you pay, and the regulations you have to comply with. This helpsheet deals only with the advantages and regulations of being self-employed.
As a self-employed person you only have to pay income tax twice a year on 31 January and 31 July. This means you can hang on to your money for longer than an employee who has tax deducted under PAYE from every pay packet.
You must make sure you have the money ready to pay the tax when it is due as you will be charged interest on any tax paid late.
If you work in the construction industry you may have tax deducted from each of your sales invoices by the contractor you work for, under the Construction Industry Scheme (CIS). You may be able to reclaim some of the CIS deductions each year when you submit your tax return.
Expenses to Claim
- The cost of any goods or services you use fully for your business can be deducted from your sales revenue for tax purposes. Where an item is used partially for your business and partly for private purposes, such as your private car or home, you can claim the business proportion of the costs against your business profits. However, you must be able to justify the business proportion with evidence such as the miles driven, or space used by the business.
- Capital allowances - if you purchase an item that is expected to last several years, such as a van, you can claim a special deduction known as a capital allowance. From 1st January 2019, the annual invest allowance (AIA) allows the first £1,000,000 you spend on equipment each year to qualify for 100% capital allowances in the year of purchase. This does not include cars. The AIA limit is expected to reduce to its former limit of £200,000 per annum from 1 January 2021.
- Loan interest - if you take out a business loan the interest paid on that loan can be deducted from your sales revenue. The loan must be taken out to fund your business, rather than a personal loan or credit card borrowings.
- Government funding - if you live in an area in the UK that has been designated as a regeneration area you may qualify for a government funded programme to help people start their own businesses.
- Charitable support is also available from the Prince's Trust throughout Britain for those aged 18 to 30 who wish to start their own business.
- Self-employed credit - if you have been registered as unemployed for at least six months you may qualify for a self-employed credit of £50 per week if you start your own business. Ask at your local Jobcentre Plus office for more details.
- Working and child tax credits - You may qualify for these while you run your own self-employed business. Your tax credit award is based on your family's joint income including your self-employed profits, but it will also be determined by the number of hours worked by the adults in the family, and the number of children aged under 16.
Your Tax Obligations
Tell the Taxman
When you start your own business you must register as a self-employed person with the Taxman (HMRC). It is best to do this as soon as possible after you start to charge your customers for the goods you sell or for the services you provide. You can register...
- On the HMRC website - https://www.gov.uk/working-for-yourself
- By telephoning the tax office on: 0300 200 3504
- By completing the leaflet CWF1: Becoming self-employed and registering for national insurance contributions and tax.
You must register as self-employed even if you make a loss from your business. Every partner in a partnership business must register separately as a self-employed person. If you do not register with the Taxman by 5th October following the end of the tax year in which you started your business you may be charged a penalty of up to 100% of the tax and national insurance you do not pay as a result of the failure to notify.
As a self-employed person you may have to pay two types of national insurance contributions (NICs) known as Class 2 (a set weekly amount) and Class 4 (calculated with reference to business profits).
You must complete a self-assessment tax return every year to report the income and expenses from your self employed business and any other income you have to the Tax Office.
Register for VAT
When your sales for 12 months reach the compulsory VAT threshold, you generally have to register for VAT within 30 days.
How We Can Help You
We can help you register with the Tax Office for tax, national insurance and VAT. We can show you how to keep accurate records for your business and complete tax and VAT returns. As your business grows we can discuss tax planning ideas with you to ensure your tax bills are kept as low as possible.