FAQ’s about Self-Employed/Sole trader

You may also find the following pages helpful, FAQ Centre, Tax Return FAQ's, Payroll FAQ's, VAT FAQ's, Limited Company FAQ's.

Answers to some of the most frequently asked questions about both sole traders and the self employed...

1. How much tax will I pay being self employed?
2. Do I have to pay National Insurance?
3. Can I claim the use of my home as a business expense?
4. How do I register as self employed?
5. Can I claim for travel expenses?
6. How do I record business expenses?
7. Benefits of going self employed?
8. How do I pay tax?
9. When do I have to charge VAT?

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, this should cover you for tax and national insurance, but you will be able to adjust this over time as you get a feel for your likely tax bills.

Your take home pay is your profit i.e. turnover – less expenses, tax and National Insurance. See below for a rough illustration.

Annual income            Annual take home pay            Monthly take home pay
£20,000                        £17,270                                        £1,440
£40,000                        £32,800                                        £2,730
£60,000                        £47,770                                        £3,980
£80,000                        £61,210                                        £5,100

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 – your accountant can advise you on this. However, as a rough guide, anything which is a business cost is tax deductable.

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 Contributions which is paid at a flat weekly rate of £2.40 (2010), although if your annual profit is over £5,715 you fall into the Class 4 National Insurance Contribution category as well, more about this in a moment.

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.

There are two ways to make payments - either by monthly Direct Debit which you can register online for, or by a quarterly bill.

Class 4 NI is based on your profits not your turnover (lots of people get confused about this), if your profits for the year are between £5,715 and £43,875 you’ll pay 8% and 1% thereafter for any profit over that amount. Your National Insurance Contributions are worked out along side your tax return and you pay them with your income tax.

3. Can I claim the use of my home as a business expense?
HMRC state: ‘. . . it is possible to apportion the use and cost of a room on a time basis, and to allow the expense of the room during the hours in which it is used exclusively for business purposes, in the same way as it is possible to calculate the business expenses of a car which is sometimes used for business purposes exclusively and sometimes used for pleasure.’

Essentially this means, you can claim for electricity, heating and water and mortgage interest for the use of your home as an office space. You will need to take into account how many days a week you're working in the office; you can also claim for council tax on the same basis but you will need to be careful not to fall into a business rates charge. As your room is used solely as an office and not personal use. 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 change to 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.

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. Failure to register within 3 months will result in a fine.
The quickest and easiest way to do this is by registering online.

Alternatively you can call the newly self-employed helpline on: 0845 9154515.

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 contact HMRC.

For more information visit our Setting up as a Sole Trader page.

5. Can I claim for travel expenses?
Yes. You can claim for business mileage, rail travel and any other business related travel costs you incur. You will need to make sure you keep all receipts in order to do this.

Business mileage is the travel you do for your job. It can include travel to a temporary work place but it doesn’t include:

• Normal travel between home (or anywhere that is not a workplace) and your permanent workplace.
• Private travel.

6. How do I record business expense?
You need to keep records of dates, mileage and details of all your work journeys. You may be able to get tax relief for business mileage when you use your own vehicle on business, or for fuel you buy when you use a company car. You can go back several years to get the relief the time given depends on whether you’ve previously sent in your Self-Assessment Tax Return.

Download our free Quick guide to company cars for more information on company vehicles. 

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 you choose, 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 on 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. This may mean doing the 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 to even start when you are in full time employment providing your employer is okay with this.
• 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 out of other premises, you will need to pay rent and other overheads.

For more information on the pro’s and cons of being self employed visit the following pages:

• Advantages of being a freelancer
• Disadvantages of being a freelancer

8. How do I pay tax?
Self Assessment involves completing an online or paper tax return. You tell HMRC about your income and capital gains (profits) on the tax return, or claim tax allowances or relief's. There are deadlines for sending your tax return in - and penalties/interest charges if it arrives late – visit our Tax Return page for more deadline information.

9. When do I have to charge VAT?
You will not need to charge VAT to any of your goods or services until you have reached the VAT threshold amount of £70,000 (As of 1st April 2010)or if you expect it to reach £70,000 in the next 30 days then you must register for VAT.

Once over the threshold amount it is mandatory that you register for VAT, and start charging interest to 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:

• VAT Basics
• VAT Guide
• VAT Flat Rate VAT Schemes Guide

Hopefully the above information has helped give some clarity on some of the most common questions asked when being self employed or a sole trader. For more information or a general chat about your business plans please call us on 0500 234111 / 01442 275767 or email: jessica@easyaccountancy.co.uk

You may also find the following guides helpful:

• Developing your business online
• Freelancing part time
• Finding freelance work
• Limited Company FAQ's
• Payroll FAQ's
• VAT FAQ's

You may also find the following pages helpful, FAQ Centre, Tax Return FAQ's, Payroll FAQ's, VAT FAQ's, Limited Company FAQ's.