Are you ready to be your own boss? Brilliant news! Small businesses accounted for 99.3% of all private sector businesses at the start of 2018 and 99.9% were small or medium-sized businesses. Helping those driven to do their own thing is what we love to see at Heelan Associates.
We thought it would be helpful to share all of the things to consider. This might help you create a ‘to-do’ list to get started on the right foot.
Tell the tax man
You need to register with HM Revenue & Customs (HMRC) for a tax return as soon as possible. The timescale used to be 3 months but has since been replaced with ‘as soon as you start’.
If you are self-employed or a sole trader you will need to complete a tax return each year. There is a special allowance for earning under £1000 that can mean you don’t need to submit a tax return. Read more about it in our blog on the Trading Allowance.
You can register here, the links on the page differ if you have previously been self employed before or not, so ensure you select the option that best applies to you.
If you are new to self-employment you will be taken through a few quick steps to open an online account. You will want to do this for future use and if you complete your own tax return. You will then fill out an online form with your details and that of your business.
If you are not new to the tax return system, it’s a simple form to fill out online and send.
TIP: If you are very near the tax year end (5th April), consider a start date after this to avoid having to fill out another tax return for a week.
If you are intending to be a Limited Company you will likely still need a tax return however, for you personally.
You will need to submit a company (‘corporation’) tax return, full accounts to HMRC and another set to Companies House. We won’t cover this in detail here, but you will need to form the business with Companies House and register with the HMRC – including for Corporation Tax, possibly Payroll and VAT.
Should I be a limited company?
Becoming a Limited Company impacts the dates and information you will need to hold and submit for your business.
‘Pros & Cons’ of becoming a Limited Company
- Becoming a Limited Company in most cases protects you and your assets (‘limited liability’).
- Very tax efficient – You can mix your income with salary and dividends, and the mix of tax rates are generally favourable.
- Often has the feel of being a more professional/established/’bigger outfit’.
- ‘Cleaner’ to invest in if you are taking on investment or partners.
- Cost is the main concern – from a tax point of view a Limited Company should be used when savings outweigh cost. Roughly £35k pa+ is a good time to go Limited (although it can be worth it if your turnover is less, in some situations).
- The reason for this higher cost is the amount of paperwork and returns required to be compliant. It’s *very* difficult to completely do it yourself due to the need to meet the various legal requirements, accounting knowledge (you have to submit full accounts) and having software that is set up properly to file.
- The tax and company law combination create more ‘moving parts’ (and tax law!) to take into consideration.
- Strict book/record keeping required, including recording of decisions and dividends with the correct paperwork.
- More difficult to close than self-employment if you cease.
How do I pay Tax and National Insurance? When do I need to pay my tax?
You pay both (Income) Tax and National Insurance once a year on your tax return now.
No need to provide accounts with the tax return, but best practice is to have these prepared to get the most accurate figures and make the best financial decisions.
Tax year runs from 6th April until 5th April. It is best to run your accounting year in line with this or to the 31st March. This will shortly become the only option with the introduction of ‘Making Tax Digital’ for income tax, due in 2024.
You pay the tax/NI due by 31st Jan following the end of the tax year. This is the same date you must file your tax return by.
If you owe over £1,000 in tax for any one year, in most cases you will be asked to pay ‘on account’ (up front) for the next tax year. HMRC presumes you will earn the same amount again and the amount due will be the same amount of tax you have to pay this year, divided into two payments.
By 31st Jan 2023 you owe £1200. You would be asked to pay £1800 on 31st Jan 2023 (£1200 for the year, £600 up front for next) and then £600 on 31st July 2023 (the second £600 for next year). As you can see, this can be quite a lot to find it you are unprepared for it.
When you come to pay your next tax bill in 2024 you will have paid £1200 towards it.
With a Limited Company, it is as above for any personal tax due (normally on dividends).
The company itself pays once a year, ~9 months after its own year-end.
What are the other key dates?
You may see reference to the 5th October for tax returns – this was the old paper deadline submission deadline and was important if you had tax debt you wanted taken from employment income.
If Limited, you have 9 months to file your accounts at Companies House after you first formed – important in the first year. After that its 9 months after the company year end.
If Limited, corporation tax return is due 12 months from the company year end, but normally you would do this at the same time you prepare the accounts to Companies House. Your company tax bill is due to be paid earlier than the return deadline, so you wouldn’t normally wait a full 12 months to submit.
There are other important deadline dates if you work in the construction industry engaging subcontractors or take on staff/have a payroll that we have written other blogs on.
Do I need to be VAT registered? Should I be?
You need to be VAT registered (in most cases) when you reach £85,000 of sales in a 12 month period.
Initially you only want to consider registration in a few circumstances (you provide mainly services to reasonable size/VAT registered companies for example).
If you do register, you will need accounting software to keep and submit your records digitally, in order to comply with the Making Tax Digital requirements.
Read more about VAT registration in this blog post.
Do I need a business bank account?
If you are self-employed or a sole trader you need a separate bank account as best practice. Whether it is a specific ‘business bank account’ is up to you.
If you are a Limited Company you 100% need one, in the Limited Company name as the business must be a separate legal entity to you.
Business accounts with most ‘traditional’ banks will charge you around £7 per month, maybe free for a while if you are a new customer to the bank.
Business accounts will charge you to bank money in them (especially cash). Normally not electronic payments but check the potential tariff.
There are more emerging ‘challenger banks’ that are offering business accounts now too which are low cost, however, do choose whichever ‘brand’ you feel most comfortable with.
How do I keep my records? Do I need software?
HMRC are moving towards a digital tax system.
Although delayed until 2024, they have plans for quarterly digital updates from everyone, so software should be considered, but not essential at this point. Xero and Quickbooks are the two market leaders in this area.
You can read more about this in our Making Tax Digital For Income Tax and Self Assessment Basics Guide.
Limited Company Records
If you are a Limited Company, it is much more essential as you effectively need to be able to know exactly the balance of every asset & liability the company has at a given day. Every penny of the company’s money will need to be accounted for – software and good book-keeping will do this.
Self-employed or a sole trader
If you are self-employed or a sole trader, your records can be as simple as a list of all your income and expenses. Ideally in a software or spreadsheet, with expenses by category (stationary, materials, software etc). This is generally sufficient information to complete your tax return.
A separate list should be kept of big items such as a laptop. Really any bit of equipment over circa £150 that will last more than a year. For tax return purposes these generally go in a different box (Capital Allowances/Annual Investment Allowance boxes).
What can I claim against my tax or ‘put through’ my business?
The general rule is anything ‘Wholly and Exclusively’ for business use. The rules vary depending on Limited or not, but this concept is universal.
General list of standard items:
- Uniform/protective clothing
- Travel / Subsistence
If only it were that simple us accountants would be out of a job! There are many expenses that aren’t tax deductible when you think they should be. A good example of some of the difficulties around expenses can be seen in our blog on Tax Deductions for Hair, Clothes, Make up and Personal Care.
You may also have expenses you incurred before starting your business; you can read more on this in our blog on ‘Pre-Trade Expenses‘.
What about working from home?
There are two ways of doing this. Actual costs incurred, using a fair and reasonable way to work out the business amount, or the HMRC fixed rate of £10-£26 per month depending on how many hours you work at home.
Limited Company owners also have an ‘HMRC’ amount of £6 per week, but the actual costs method is much more complicated to do (you have to lease a room in your house to your business).
How about vehicle costs?
As a sole trader you can either use a HMRC mileage rate that covers all costs (fuel, insurance, the purchase price itself) or add up all your costs and use those.
You need to keep a mileage log for all your business journeys i.e how many miles, what you did, who you saw, date and locations.
The mileage rates at the time of writing are 45p a mileage for the first 10,000 miles in a tax year and 25p for mileage in excess of that.
If you use the second method you need to disallow some of the costs for when you use the car personally, again using a fair and reasonable method. This fair and reasonable method normally needs a mileage log to support it….
You can read more about Sole Trader Motor Expenses in our blog on the subject.
As a Limited Company, in the majority of cases you will want to just use the mileage rate as its more tax efficient than having a company car. This could change if it is a van and not a car.
Business journeys are all that is claimable against your tax bill. The rules vary between Limited/self-employed, but the key is ‘commuting’ to a permanent workplace or ‘base of operations’ is not allowable.
What about entertainment?
When you buy coffee or lunch for a business contact this is generally ‘entertainment’. This can go through your company/business but is not deductible for tax purposes. A note of who you entertained and what you discussed should be retained.
How do I pay myself?
If you are a sole trader or self-employed, it is simply a case of transferring money to your personal account. These are classed as ‘drawings’.
If you are a Limited Company it is slightly more complex, as you will need paperwork in place to classify what that money is you have drawn. If you do not have the paperwork in place, you technically owe the money back to the company in what is known as your ‘Directors Loan Account’.
Normally you will pay yourself a small salary and the rest of your money will be profit from the company (Dividend). Both of these need the right paperwork and in reference to the salary, will need reporting to HMRC each month electronically.
How much should I set aside for tax?
This is a tough question as so much depends on profits and circumstances but there are some good guidelines.
If you are a sole trader or self-employed, a good amount to put aside is around 25%.
This helps account for the situation of having to pay for payments on account and national insurance. You will pay tax on anything over ~£12k (at 20% to begin with). You will pay National Insurance on anything over this amount as well (at 9%). These are very rough guidelines. If you start to earn profits of over £50k this will not be enough. When you reach that stage its probably time to have looked at ‘Going limited’!
If you’re a Limited Company, the company should always retain around 19% of its profit to pay it’s corporation tax. You may also need to save some of the money you draw out to pay personal dividend tax. To be safe, in the first year around 7-10% of the money you draw should be a good amount.
How do I prove my income for benefits or a mortgage?
‘SA302’s are what you need to provide – this is simply your tax calculation from your tax return.
Many lenders will want 2-3 years of these and will average profits over the 2/3 years. This can be a little tough if you have only been trading one year, but you should speak to a mortgage broker.
For benefits, the ‘gross’, or ’taxable’ income is at the top of the calculation as well. A little like employed salaries (‘I’m on £25k a year’) are quoted gross, your gross income will be at the top before tax.
What do I do about a pension?
If you have existing pension arrangements it is worth seeking out an independent financial advisor (IFA) to give you some guidance.
In tax terms, you could contribute to a personal pension and will generally get tax relief. This is added at 20% to your ‘pot’. If you are a higher rate taxpayer (you earn over around £50k a year) you will be due some further tax relief and often results in repayment of tax. This is normally done in a tax return for the self-employed or sole trader and Limited Company directors.
If you are a Limited Company, presuming you have the right set up with your pension company, the business can normally contribute on your behalf. This is an extremely efficient way of moving money from the company into your hands as this payment is tax deductible for the company.
You can still make personal contributions as a Limited Company owner but it is (generally) not as tax efficient.
Where can I get support? Are there groups I could join?
In most industries, there are Facebook Groups. LinkedIn can be hit or miss for groups. Always double check any ‘advice’ given out in these groups surrounding tax with your accountant or an accounting professional.
Check out our blog (use the search), YouTube and Social media for tax updates. Sign up to our mailing list too, to recieve updates to your inbox.
Do I need an accountant? If so, how do I choose one?
UK tax law is approximately 22,000 pages long and changes daily, depending on what happens in the courts (tax tribunals). For this reason, up to date advice and guidance is key to making sure what you are doing is correct. That aside, a good accountant will pay for themselves in the tax savings and save you time and worry. In addition, their fee is tax deductible!
If you are self-employed or sole trader it is definitely possible to register and complete your own tax return. The largest consideration is if you want to – or have the time to spend – doing this.
If you are a Limited Company it is near on impossible to do this yourself so you will need an accountant.
In terms of choosing one, you should check out a video and blog here: https://www.heelanassociates.co.uk/10-key-traits-to-look-for-when-you-hire-an-accountant/
In terms of pricing and service, accountants vary wildly. Like most things in life, you generally get better, more proactive service (and therefore usually save more tax) from those that charge more. Do your research.
The quickest way to increase your income? Pay less tax….