FAQ’s about Self-Employed/Sole trader
Below are the answers to some of the most Frequently Asked Questions from sole traders, freelancers and the self employed.
- What are the benefits of going self employed?
- How do I register as self employed?
- How much tax will I pay being self employed?
- How do I pay tax?
- Do I have to pay National Insurance?
- When do I have to charge VAT?
- How do I record business expenses?
- Can I claim for travel expenses?
- Can I claim the use of my home as a business expense?
- I'm a CIS worker, can I claim expenses?
1. How much tax will I pay being self employed?
Unlike permanent employment, being self employed means you will be paid the whole invoice amount without any tax removed, so don’t be tempted to take all the money out and spend it, you’ll need to put some aside to cover your taxes.
As a general rule, we recommend you put 30% of everything you earn to one side, and this should cover your tax and National Insurance, but you will be able to adjust this over time as you get a better feel for your tax liabilities.
Your take home pay is your profit - i.e. income less expenses, tax and National Insurance. See below for a rough illustration, these figures are based on estimated expenses of 10% of your turnover.
Annual income Annual take home pay Monthly take home pay
£20,000 £15,666 £1,280
£40,000 £28,146 £2,345
£60,000 £39,295 £3,275
£80,000 £49,735 £4,145
As your tax is based on your profit after allowable expenses, you need to be sure that you are claiming everything you are entitled to and ensure that your tax bill isn’t larger than it needs to be – your accountant can advise you on this. However, as a rough guide, anything which is a business cost is tax deductible.
2. Do I have to pay National Insurance?
Yes. If you are self employed you are responsible for making sure you pay your own tax and National Insurance contributions.
The norm is to pay Class 2 National Insurance (NI) Contributions, which are paid at a flat weekly rate of £2.70 (2013/2014), although if your annual profit is over £7,755 you fall into the Class 4 National Insurance Contributions category as well. See below for more details on this.
Your National Insurance contributions go towards certain benefits, such as maternity leave and state pension, however they don’t count towards additional state pension, statutory sick pay or job seekers allowance. Therefore it is advisable to make your own arrangements for your income protection insurance and a personal pension.
If your profits (not your turnover - many people get confused about this) are over £7,755, then you’ll also be responsible for class 4 NI contributions. If your profits are between £7,755 and £41,450 (2013/2014) this is an additional 9%, and any profit over £41,450 there is an additional 2% to pay as well.
Your National Insurance contributions are calculated alongside your tax return and you pay them with your income tax. You will need to pay your Class 2 National Insurance contributions either monthly or bi-annually by Direct Debit to Her Majesty's Revenue and Customs (HMRC).
3. Can I claim the use of my home as a business expense?
Yes, you can. HRMC states it is possible to claim back expenses for a room in your home, for the hours you use it for business purposes.
Essentially this means you can claim for electricity, heating and water, council tax and mortgage interest for the use of your home as an office space. You will need to take into account how many hours a week you are using the space and then calculate the cost of the room per hour. These amounts would normally be charged in your accounts to 'use of home as office'.
To be honest the ‘use of home’ allowance is a little complicated, and changes yet again if you become a Limited company and continue to work from home, so it is probably best to speak with an accountant to get the most accurate and up to date information.
For more information on expenses please read our Guide to Self Employed Expenses.
4. How do I register as self employed?
First and foremost you will need to register with HMRC. This should be a top priority for any newly self employed person as failure to register within three months will result in a fine. The quickest and easiest way to do this is by registering online.
If you have an accountant or agent who will be completing the form for you, you will need to ensure that you have signed a 64-8 form: Authorisation for your agent. This is a formal agreement which allows your accountant to act on your behalf, and to contact HMRC.
Alternatively you can call the newly self employed helpline on 0300 200 3504.
For more information visit our Setting up as a Sole Trader page.
5. Can I claim for travel expenses?
Yes. You can claim for your car, rail travel and any other business related travel costs you incur. Although you should make sure that you keep hold of any receipts, to prove that the expense was incurred.
If you do not operate as a Limited company, claiming for usage of your car is very straightforward. If your car costs you £10,000 to run in a year, and you use it 50% of the time for business, you can claim back £5,000.
6. How do I record business expenses?
For any business expense, you need proof of purchase, usually in the form of a receipt. These receipts are then added up at the end of the year and the value put on your self-assessment tax form. HMRC recommends that you keep your receipts for six years, so make sure you invest in some box files!
7. What are the advantages and disadvantages of going self employed?
The advantages of being self employed are:
- You are your own boss - something which can be very satisfying.
- You will naturally work in different roles and for many different companies - this will help you to build a unique range of skills and experience.
- You have the freedom to work when and where you choose, and for however long you like.
- There is a direct link between work effort and reward, which sometimes doesn't exist as an employee.
- You have more flexibility over the payment terms that you can negotiate.
- You can work for multiple clients at the same time, on many different projects, which can also increase your pay.
- Depending on your individual skills and the state of the industry in which you work (or the market in general) you can command very high rates of pay.
However you also need to consider the following:
- You do everything yourself and are responsible for the day-to-day running of the business.
- You will rarely have the resources at your disposal that are available to an established business owner, and this may mean doing tasks that you dislike.
- Large salaries or income are rare in the early days - but you could be lucky!
- It is not unusual for newly self employed people to have a second job to help provide a guaranteed source of income for day-to-day living costs. Or you could even start working for yourself when you are still in full time employment, providing your employer is OK with it.
- You need to offer a product or service for which there is demand. This may depend on projecting a certain image, perfecting a technique or making a product unique.
- Expanding too rapidly, or conversely not being quick enough to seize a chance, may be detrimental to your business.
- Working from home is the most effective when you have the space and facilities to do so. If you work from other premises, you will need to pay rent and other overheads.
For more information on the advantages and disadvantages of being self employed, visit the following pages:
8. How do I pay tax?
Self Assessment involves completing an online or paper tax return. You tell HMRC about your income and your expenses, which ultimately gives them details of your profit figure, and this is what you will be taxed on. At the same time you can also advise HMRC about any other tax allowances or reliefs.
9. When do I have to charge VAT?
You will not need to charge VAT on any of your goods or services until you have reached the VAT threshold amount of £79,000 (as of 1st April 2013). If at any point you expect it to reach this figure in the following 30 days, then you must register for VAT immediately.
Once over the threshold amount, it is mandatory that you register for VAT and start charging VAT on your goods and services, from the day you have registered. For more information on VAT, visit our easy to read guides on the following pages:
10. I'm a CIS worker, can I claim expenses?
As a builder working under the CIS (Construction Industry Scheme), you certainly can claim any expenses incurred as a result of your work. Our sister company, Brian Alfred, could even get your tax rebate amount back to you within 24 hours. For more information visit the Brian Alfred Website.
Hopefully the above information has helped to give clarity on some of the most common questions asked when becoming self employed or operating as a sole trader. For more information or a general chat about your business plans, please call us on 0500 234111 / 01442 275767 or email email@example.com.
You may also find the following guides helpful:
- Developing your business online
- Freelancing part time
- Finding freelance work
- Limited Company FAQs
- Payroll FAQs
- VAT FAQs
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