Going self-employed?  Here’s what you need to know…

This factsheet is intended for those operating or intending to operate as a sole trade, if you are trading through a partnership or a company please refer to [insert factsheet] and [insert factsheet].  This is intended to be a summary of the most important points to consider when starting out in business on your own,

Important Dates

5 April – end of the tax year.

5 October (following the end of the tax year) – the date by which you should notify HMRC you have commenced trading.

31 January – filing deadline for self-assessment tax returns.  Payment of income tax and National Insurance for the previous tax year is also due as well as the first payment on account due for the following tax year.

31 July – second payment on account due.

Housekeeping

Separate bank accounts: should be set up to handle all business income and expenditure, if personal funds are transferred into the business account to support the payment of expenses, records should be kept of those transfers.  A business reserve account should also be set up so tax and National Insurance can be put aside regularly.

Records: must be retained for at least five years and ten months form the end of the tax year to which they relate.  This includes all bank accounts, invoices, receipts, calculations of claims, fixed assets registers, employee information, and any other documents related to the operation of the business.

Accounting

Basis periods: are the accounting periods with reference to which tax is calculated in the tax year.  If your accounting period ends on the same date as the tax year (or 31 March as approved by HMRC), your basis periods will be the same as the tax year.  If it ends on any other date you will have profits subject to tax twice in the opening year, relief (overlap relief) on which can only be claimed when the accounting period end changes or trade ceases.

Accruals: is the default basis for accounting for income and expenditure i.e. when the invoice was raised not when the payment was actually made.  Where your turnover is below £150,000 you can elect to use the cash basis.

Mileage: expenses can be claimed on the actual business proportion of expenses incurred in qualifying travel or at HMRC flat rate (45p per mile for the first 10,000 business miles per year, 25p per mile thereafter).  Commuting is not qualifying business travel.

Working from home: expenses can either be claimed on the proportion of household expenses (water, gas, electricity) which relates to business use and apportioned over the number of rooms used and the number of hours worked or using HMRC flat rate expenses.

Training: expenses are deemed to be a capital expenses where they give you new knowledge or skills.   Refresher training is a revenue expense.

Disallowed expenditure: includes all business entertaining (including most gifts to client/suppliers), capital expenditure, depreciation, and all expenses not incurred wholly and exclusively for the purposes of the trade.  Where there is a duality of purpose and the proportion of personal expenditure can be identified the expense can be apportioned, if it cannot be identified the whole amount is disallowed.

Capital Allowances: can be claimed on plant and machinery purchased for use in the business.  The first £1,000,000 (current threshold) of qualifying capital expenditure can be claimed under the Annual Investment Allowance resulting in 100% relief in the year of acquisition.  If AIA is not available relief is given at 6% or 18% depending on the nature of the asset.  As with all expenditure if there is an element of personal use, a proportion must be disallowed.  A register of all asset acquisitions and disposal should be retained.

VAT registration: is compulsory when taxable turnover exceeds the threshold (currently £85,000).  Not all services are subject to VAT and if you are providing exempt services you will not be able to register.  The input VAT on certain expenses incurred before VAT registration can be claimed in the first VAT return.

Employees: earning over the lower earnings limit must receive their salary net of tax and national insurance contributions, all amounts must be reported to HMRC monthly using HMRC’s basic PAYE tools or compatible software.  Employees are entitled to certain rights such as paid holiday, protection from unfair dismissal, and sick pay etc.

Taxation

Income Tax: is due on total earnings over the personal allowance.  Self-employment income is taxed as non-savings income (at 20/40/45% to the extent that the income falls within your basic, higher, or additional rate bands) and is taxed after employment income.

National Insurance Contributions: are payable once the small profits threshold is breached.  Class 4 NICs are payable at 10.25% and Class 2 NICs at £3.15 per week (from 6 April 2022).  Both are due to be paid by 31 January following the end of the tax year.

Payments on Account: are due on 31 January and 31 July in respect of the tax return which is yet due.  Each payment is 50% of the previous year’s income tax and Class 4 NICs liability.  If you have overpaid, a refund will be due once the return has been submitted. Where your final tax liability is higher than the total of the payments on account a balancing payment will be due i.e. if your first year (2021/22) liability is £3,000, each payment on account will be £1,500 (due on 31 January 2023 and 31 July 2023).  If your 2022/23 liability is £4,000 you will have a balancing payment of £1,000 due on 31 January 2024 plus your first 2023/24 payment on account (£2,000), a further £2,000 would be due by 31 July 2024.

Penalties: are charged for the late notification under self-assessment, late filing or payment of returns, and for errors in returns.  Where the error relates to UK source income the maximum penalty is 100% of the potential lost revenue.