Don’t Worry About Tax Returns!
So, you want to take the leap and set up your own business? Congratulations! You are at the beginning of an exciting journey in your life!
Here is our simple tax guide to banish away those concerns about becoming self employed.
Before you get started, there are a few things that you need to cover,the first of these is setting up as self employed with the HMRC and most likely, registering as a sole trader.
Why Do I Need to Register?
If you are self employed, you need to register online with the HMRC so that they know how much you are earning and they can properly assess the tax that you pay.
Before you start online you will need to…
Name Your Business
For example…Jo Bloggs Footcare Services. This is required when you complete the form online. It is also the name that you would use for your bank account, so make sure you are happy with it and that it is future proof!
You can pick any name that you choose, but you should clarify first that there are no other companies owning the same name (by the term owning we mean that they have the Intellectual Property of it and own the sole right to use it, for which they will have applied and been granted from Companies House).
Have your National Insurance number ready for your registration.
If you are operating alone with no partners or employees, then you are likely to be a Sole Trader. Check with an accountant if you are not sure, but for most people starting off this is the simplest option.
When do I Register as Self Employed?
According to the HMRC, you should register at the earliest opportunity and remember you will only pay tax when you have taken a salary! There are likely to be many expenses that you want them to take into consideration when you declare your income.
Legally, you need to register by the 5th October of your business’s second trading year.
Online, you can apply for a Government Gateway Account, this grants you the access to the government’s range of online services, the most important of which is the HMRC’s Self Assessment Portal. When you get to this part of enrolling, you will receive a UTR code and an activation code. You will access the code when in arrives and set up your account.
The HMRC will guide you as to what is required and when, they will send you message online and you should always sign in to their site, beware of spoof emails!
You will need to keep records, often very simply money in and money out. You will need to keep a note of how your money has come in from your customers and also what you have had to spend. There may be many items that can now be considered as expenses for your business including petrol, car maintenance, mobile phone, broadband etc. These will possibly be offset and thus reduce the amount of tax to be paid.
Budget For Your Tax Bill
When you are employed, your employers calculate and send your tax via PAYE. When you are self employed, you draw money from your bank account and the tax is taken only when you file your tax return. So make sure that you don’t draw all your money but leave some aside, a good idea is to have a savings account for keeping tax money separate.
How much tax will I pay?
The tax you pay will be measured on the amount that you have drawn from your business account, offset by the amount of expenses that you can claim.
The first £11,850 is tax-free.
Then the Basic rate (20%) tax is up to £34,500
Higher rate tax (40%): between £34,501 and £150,000 =
Additional rate tax: the next £150,000 = 45% tax.
Where does VAT come in?
Your business will need to become VAT registered when you have a turnover (cash paid in to your business) that exceeds £85,000 per tax year.
Do I need an accountant?
As a small business owner, you may feel able to complete your tax return yourself. There are even apps for mobile phones these days that make this easier.
However, if you feel more comfortable having someone to handle it for you, you can use a book keeper or an accountant who will file your return or prepare it for you.
Simply keep your bank statements and attach the receipts and invoices that you have and it can remain a simple task! The better your record keeping, the better the price from the accountant!
Prices are likely to be £200-£500 per year for a sole trader. Remember that they can sometimes save you paying more tax by ensuring you are offsetting all the expenses which are available to you.