Considering Self-Employment? What Tax Advantages of Self Employment Will You Encounter?

There are a number of advantages of self employment, but there are also obligations and regulations that you’ll have to comply with too, particularly those relating to tax law.

Here are some of the tax advantages of self employment and obligations you will encounter.

Tax Advantages

Cash-flow

As a self-employed person you are only required to pay income tax twice a year on 31 January and 31 July. Unlike an employee who has tax deducted under PAYE from every pay packet, this means you will be able to hang on to your money for longer. However, you must ensure you have the money ready to pay the tax when it is due as you will be charged interest on any tax which is 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

One of the other advantages of self employment is the cost of any goods or services you fully use for your business can be deducted from your sales revenue for tax purposes. However, where an item has joint-usage and is used partly for business and partly for private purposes, by that we mean items like your private car or home, you can only claim the business proportion of the costs against your business profits. If you chose to do this 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 like a van that is expected to last several years, you can claim a special deduction known as a capital allowance. The first £25,000 you spend on equipment each year qualifies for 100 percent capital allowances in the year of purchase. This, however, does not include cars.

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, however, be taken out to fund your business, rather than a personal loan or credit card borrowings.

Government funding and charitable support

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. Your local Jobcentre Plus office will be able to give you more details.

Working and child tax credits

You may qualify for these benefits even whilst you are running 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 under 16.

Your tax obligations

Tell the Taxman

When you start your own business you must register as a self-employed person with the HMRC. It is advisable 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 as self-employed in one of three ways:

  • Online at www.hmrc.gov.uk/self employed/register-selfemp.html.
  • By phone on: 0845 915 4515.
  • By completing the leaflet CWF1: ‘Becoming self-employed and registering for national insurance contributions and tax’.

You must register as self-employed even if your business makes a loss. Each partner in a partnership business must register separately as a self-employed person. If you fail to register with the Taxman by 31 January following the end of the tax year in which you started your business, you may be charged a penalty of up to 100 percent of the tax and national insurance you owe.

National Insurance

Self-employed people must pay two different types of national insurance contributions (NICs) known as class 2 and class 4.

Tax returns

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.

VAT

A further advantages of self employment is that when your sales for 12 months reach the compulsory VAT threshold (currently £77,000) you must register for VAT within 30 days.

How can Steven Glicher & Co accountants can help you?

We can help you to register with the Tax Office for tax, national insurance and VAT. We can also advise you about how to keep accurate records for your business and complete tax and VAT returns. As your business grows we can then discuss tax planning ideas with you to ensure your tax bills are kept as low as possible.

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