Self Employment Tax Guide
Bookkeeping
Bookkeeping
Bookkeeping is an essential part of any business operation as it helps to keep track of all the financial transactions of the business.
Some advantages of bookkeeping are as follows:
Maintaining good records assists in effective decision-making
Most business decisions involve a financial element. Having access to accurate and up-to-date information will assist you with your decision-making processes.
Bookkeeping will allow you keep organised with your customers and suppliers
You need to know quickly and accurately your sales and purchase ledger balances to allow you to resolve and take further action on outstanding/disputed sales and purchase invoices.
Preparation of management information/accounts
It is vital to review management accounts information on an ongoing basis. This allows you to quickly assess the profitability of your business and can assist
zwhen estimating future tax and NIC liabilities. It is also vital information when making business decisions.
Applying for finance agreements, loans and mortgages
Orderly financial management information is very important when applying to obtain finance. Banks and financial institutions favour individuals who have organised and accurate business records. This can often lead to a quicker lending decision.
Helps to avoid incurring late filing and payment penalties
The late filing and penalty regime can be costly. Keeping organised records will help to ensure that you never fall foul of the strict filing and payment deadlines imposed by HMRC.
It is a legal requirement to keep good bookkeeping records
You must keep your records for at least 5 years after the 31st January submission deadline of the relevant tax year. HM Revenue and Customs may check your records to make sure you’re paying the right amount of tax.
Allowable expenses
Bite Size Expense Guide
Below are some of the common costs that you can claim as allowable expenses:
Car, van and travel expenses
- vehicle insurance
- repairs and servicing
- fuel
- parking
- hire charges
- vehicle licence fees
- breakdown cover
- train, bus, air and taxi fares
- hotel rooms
- meals on overnight business trips
You can’t claim for:
- non-business driving or travel costs;
- fines; or
- travel between home and work.
Simplified mileage claims
Instead of the actual costs you can calculate your car, van or motorcycle expenses using a flat rate for mileage.
Cars and goods vehicles
- 45p for the first 10,000 miles
- 25p after 10,000 miles
Motorcycles
- 24p for all miles
If you opt to use the simplified mileage method, you should keep a detailed mileage log of your business journeys. We can provide a mileage log sheet to assist you with this task. If you use the simplified method you can only claim the pence per mile, no other general motor costs can be claimed.
Clothing expenses
- uniforms
- protective clothing needed for your work
- costumes for actors or entertainers
You can’t claim for everyday clothing, i.e. general office clothing (even if you wear it for work).
Staff expenses
- employee and staff salaries paid through the PAYE system
- bonuses
- pensions
- benefits
- agency fees
- subcontractors
- employer’s National Insurance
Please contact us for professional advice when paying any out of pocket expenses to employees.
Office, property and equipment
- phone, mobile, fax and internet bills (percentage of business use only)
- postage
- stationery
- printing
- printer ink and cartridges
Rents, rates, power and insurance costs
- rent for business
- business and water rates
- utility bills
- property insurance
- security
- using your home as an office (only the part that’s used for business, please contact us for further details)
Reselling goods
- goods for resale (stock)
- raw materials
- direct costs from producing goods
Items purchased for private use are not allowed.
Insurance policies
You can claim for any insurance policy for your business, such as:
- public liability insurance
- professional indemnity insurance
- employer’s liability insurance
Legal and financial costs
You can claim costs for:
- hiring of accountants, solicitors, surveyors and architects for business reasons
You can’t claim for:
- legal costs of buying property and machinery as these are capital costs – you can usually claim for these costs as capital expenditure (please contact us for details)
- fines for breaking the law
Bank, credit card and other financial charges
- business bank, overdraft and credit card charges
- interest on bank and business loans
- hire purchase interest on business assets
- leasing payments on business assets
- alternative finance payments, e.g. Islamic finance
Marketing and entertainment
- advertising in newspapers or directories
- bulk mail advertising (mailshots)
- free samples
- website costs
- annual staff party (up to £150 per head, contact us for more details)
Claims for entertaining clients, suppliers or customers are specifically disallowed by HMRC.
Subscriptions
- trade or professional journals
- trade body or professional organisation membership if related to your business
Typical items that you cannot claim are gym fees, golf club subscriptions and memberships to political parties.
Donations to charities can usually be claimed separately on your tax return – please contact us for further guidance.
Self Assessment – Register as Self Employed
Self Assessment – Registering as Self Employed
You’ll need to register for Self Assessment as soon as you can after starting your business. You need to do this even if you’ve completed tax returns before.
You need to register by 5th October in your business’s second tax year. You could be fined if you don’t.
If you’ve sent a return before
Register online using Form CWF1.
You’ll need to find your 10-digit Unique Taxpayer Reference (UTR) from when you registered for Self Assessment previously.
If you’ve signed up for the online service before, you should use the same account to file your tax return.
If you haven’t sent a return before
Register online via your Tax Account and you’ll:
- get a letter with your 10-digit Unique Taxpayer Reference (UTR)
- be enrolled for the Self Assessment online service at the same time
You’ll also get a letter within 10 working days (21 days if you’re abroad) with an activation code.
You’ll need this when you first log in to your online account. You can replace an activation code if you don’t receive it or you lose it.
Self Assessment – Filing and payment regime
Self Assessment – Filing and payment regime
HM Revenue and Customs (HMRC) must receive your tax return and any money you owe by the deadline (detailed below).
| Self Assessment | Deadline |
|---|---|
| By midnight of: | |
| Register for Self Assessment if you’re self-employed or a sole trader, not self-employed, or registering a partner or partnership | 5 October (following the end of the tax year) |
| Paper tax returns | 31 October (following the end of the tax year) |
| Online tax returns | 31 January (following the end of the tax year) |
| Pay the tax you owe | 31 January (following the end of the tax year) |
There’s an additional payment deadline of 31st July if you make advance payments towards your bill (known as ‘payments on account’).
You’ll usually pay a penalty if your return is filed late or the payment is made late. You can appeal against a penalty if you have a reasonable excuse.
When the deadline is different
Submit your online return by 30th December if you want HMRC to automatically collect tax you owe from your wages and pension. You must be eligible.
HMRC must receive a paper tax return by 31 January if you’re a trustee of a registered pension scheme or a non-resident company. You can’t send a return online.
Self Assessment – Penalty and late payment regime
Self Assessment – Penalties and late payment regime
There are tax penalties both for the late filing of Self Assessment tax returns and for late payment of tax due under Self Assessment.
The table below sets out the penalty regime under Self Assessment from the 2010-11 tax year onwards.
| Late filing | Late payment | Penalty |
|---|---|---|
| Miss filing deadline | £100 | |
| 30 days late | 5% of tax due | |
| 3 months late | Daily penalty of £10 per day for up to 90 days (max £900) | |
| 6 months late | 5% of tax due, or £300 if greater | |
| 6 months late | 5% of tax outstanding at that date | |
| 12 months late | 5% or £300 if greater, unless the taxpayer is held to be deliberately withholding information that would enable HMRC to assess the tax due. | |
| 12 months late | 5% of tax outstanding at that date | |
| 12 months & taxpayer deliberately withholds information | Based on behaviour:
|
National Insurance
National Insurance
You usually pay two types of National Insurance if you’re Self Employed:
- Class 2 if your profits are £6,205 or more a year (2018/19 tax year)
- Class 4 if your profits are £8,424 or more a year (2018/19 tax year)
You calculate your profits by deducting your expenses from your Self Employed income.
The table below sets out how much National Insurance you pay if you are Self Employed:
| National Insurance Type | Rate for tax year 2018 to 2019 |
|---|---|
| (payment due by 31 January following end of tax year) | |
| Class 2 | £2.95 per week |
| Class 4 | 9% on profits between £8,424 and £46,350, then 2% on profits over £46,350 |
How to pay
Most people pay Class 2 and Class 4 National Insurance annually through the Self Assessment system.
Special rules for specific jobs
Some Self Employed people don’t pay National Insurance through Self Assessment, but may want to pay voluntary contributions. These are:
- examiners, moderators, invigilators and people who set exam questions
- people who run businesses involving land or property
- ministers of religion who don’t receive a salary or stipend
- people who make investments for themselves or others – but not as a business and without getting a fee or commission
There can also be some overlap and reduction in the NIC liability if you are both employed, and self-employed, during the same tax year.
VAT
VAT Considerations
If your business has a turnover of more than £85,000 (for the year from April 2017) over a 12 month period, you must also register your business for Value Added Tax (VAT).
When you are VAT-registered you will need to add VAT to all of your sales invoices. You will also be able to reclaim the VAT you have paid on business expenses and some capital purchases.
In some circumstances, it may be beneficial to register your business for VAT, even if your turnover is below the VAT threshold. This is usually the case if the majority of your clients are business customers who can reclaim the VAT you charge them.
Commercial considerations
Commercial considerations
Working for yourself can bring flexibility and freedoms that employed individuals do not have – however, there are a number of commercial considerations that should be taken into account before making the decision to start your own business.
We have listed some of the important issues below:
Business insurance
When you run your own business, it will usually be a good idea to take out business insurance. This can provide financial safety should your business suffer from loss due to an unforeseen event. There are many different types of business insurance, ranging from legal liability and employee-related risks through to property damage.
Which insurance you choose to take out will be determined by your income, your budget, your business forecast, the type of business you run, potential risk factors and the type of environment that the business operates in.
We have a carefully chosen panel of specialist insurers that we can refer you to who can provide competitive tailored packages, ensuring that your business is covered at all times and providing you with confidence that you have the right professional support to fall back on should the need arise.
Employment Issues
It can be an exciting time for any business when you expand and look to take on your first member of staff.
However, there are a number of important issues that you must consider and implement to ensure that you are meeting your legal obligations as an employer.
Employing staff for the first time
There are 7 things you need to do when employing staff for the first time.
- Decide how much to pay someone – you must pay your employee at least the National Minimum Wage.
- Check if someone has the legal right to work in the UK. You may have to do other employment checks as well.
- Check if you need to apply for a DBS check (formerly known as a CRB check) if you work in a field that requires one, e.g. with vulnerable people or security.
- Get employment insurance – you need employers’ liability insurance as soon as you become an employer.
- Send details of the job (including terms and conditions) in writing to your employee. You need to give your employee a written statement of employment if you’re employing someone for more than 1 month.
- Tell HM Revenue and Customs (HMRC) by registering as an employer – you can do this up to 4 weeks before you pay your new staff.
- Check if you need to automatically enrol your staff into a workplace pension scheme.
We can provide detailed guidance on these issues ensuring that you remain compliant at all times.
Regulatory Compliance
Regulatory compliance has many different definitions depending on what industry you are applying the policies to. Broadly speaking, compliance means integrating standards that follow specific requirements. Regulatory compliance is the regulations a company must follow to meet specific requirements.
Regulatory compliance is often set out by professional bodies and government. Many professions receive regular visits from their professional regulator to ensure that the business is following the correct professional standard and service. Failure to follow the correct regulatory framework can often lead to heavy financial penalties for non-compliance.
It is good practice to include a staff hand book and training manual for reference to ensure that all staff are aware and trained to an appropriate level. This will help to ensure that your business is complying with its obligations.
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