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VAT and National Insurance

When thinking about becoming a freelancer it can be quite daunting knowing that you need to ensure you pay your tax and National Insurance contributions on time. However it really is simple and easy to do.

National Insurance

As soon as you decide to set up a freelance business, whether full or part time, you need to let HMRC know by completing the relevant CWF1 form, and they will send you a quarterly bill for what is known as ‘Class 2’ National Insurance. This is a basic payment which ensures that you pay enough to cover your future state pension requirements. All additional National Insurance payments (Class 4) are calculated by your accountant when your end of year figures are completed, and the amount owed is included in your tax bill.

If you have income from more than one job i.e. you are freelancing whilst still in permanent employment you should take care to ensure you are not paying more in National Insurance contributions than you need to! If you think you may be exceeding the upper limit then you can apply for deferment of contributions.

VAT

You do not have to register for VAT unless you hit the VAT threshold, which is currently £77,000 for the year commencing April 1st 2013. You must register for VAT when your turnover rises above the threshold in the previous 12 rolling months, or if you expect it to do so in the next 30 days. You have to start keeping records and charging VAT to your customers from the date of registration, which is usually the month after your annual turnover exceeded the threshold.

What are the advantages of being VAT registered?
Even if below the threshold, many people choose to register for VAT to give their business more ‘kudos’ with customers, or simply to make it appear larger than it really is – and this is entirely up to you.

If you do choose to register for VAT then there is the advantage of being able to claim the VAT back on everything you purchase for the business, but the ultimate benefit of this will depend on the type of business you have. If you buy things in and sell them on as part of your business function then it will be an advantage, but if you just charge for your services and only buy things like stationery which are required to run the business, it will be less beneficial.

What about the Flat Rate VAT scheme?

Instead of registering for the standard VAT scheme (outlined above), it may be more beneficial for you to register for the Flat Rate VAT scheme.

Within this scheme, you charge your clients at the standard rate and pay the government at a lower rate of the gross amount. Different sectors have different rates (call us to find out what rate you might be in). 

Find below an example for an IT professional whose flat rate is 12% in their first year (new companies get a 1% first year discount):

The VAT percentage you pay is considerably lower than that of the standard VAT rate,(see below table for a full list of the standard rates depending on your profession) you than keep the difference as your profit. See example below based on a Limited Company specialising in IT:

Net amount you invoice your client  £5,000
VAT charged on top to your client (20%)  £1,000
Gross Amount    £6,000
Flat rate VAT 13.5% (this includes a first year discount of 1%)  13.5%
VAT to be paid to HMRC - 13.5% of £6,000  £810
VAT received from client    £1,000
Profit for you i.e. what you get to keep     £190

You’ll need to speak to an accountant before you decide which scheme is best for you. They’ll be able to work out the most tax efficient way to pay VAT.

The reason for this is that the Flat Rate scheme simplifies VAT administration for HMRC and so the financial benefit is passed on, to a point. The rate you pay will vary depending on your business type and when you register for VAT this will be assessed and agreed up front.

Using an accountant will ensure that you do not put yourself at risk to the various HMRC penalties and end up having to pay interest that is charged for late registration, late submission of tax returns and late payments of tax. Easy Accountancy offers freelancers who choose to operate as a sole trader an all-inclusive, fixed-free accountancy package of £30 plus VAT per month. This includes unlimited access to your very own accountant via telephone or email throughout the year for help and advice. 

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If you are a contractor working through a limited company then visit SJD Accountancy who specialise in providing tax advice and accountancy services for limited company contractors. We also provide a tailored accountancy service for SME's. For more information on this please call our New Client Services Team on 0500 234 111 / 01442 275 767.

Easy Accountancy

Easy Accountancy is the UK’s only national specialist accountancy firm for freelancers, sole traders and small businesses

If you’ve just started out as a freelancer or run a small business, you’ll definitely need a small accountant and there are plenty of options out there! However, most accountants will charge you every time you get in touch with them; for every phone call, email or meeting.

We don’t want our clients to be scared to contact us and potentially lose out on valuable tax saving advice. It's even more important when you first start out as you really need to set your business up in the best way possible. As a start up you’ll probably have loads of questions and will really appreciate the fact you can call your accountant as many times as you like without the fear of racking up large bills.

Our low cost, all-inclusive fixed-fee accountancy service includes unlimited access to your own accountant throughout the year, so you never need to worry about picking up the phone and then receiving a bill afterwards for the privilege, and covers all your business and personal tax affairs needs. All clients additionally receive: 

  • Help to run your business in the most tax efficient way possible
  • Help so you can understand the taxes you need to pay
  • Advice on the best ways to manage your business
  • Updates and reminders so you'll never miss a deadline
  • Help to ensure you maximise your tax allowances
  • Provide proactive tax advice throughout the year

We’ve saved our clients up to half on their accountancy bills – if you’d like a quote, click on the quote me button to the right of this page. Alternatively, call us on 0500 234111 / 01442 275767 or email heather@easyaccountancy.co.uk.

We also have a money-back service guarantee - all of your telephone calls and emails will be answered on the same day, or we will refund your monthly fee (another first within the accountancy world).

To appoint us as your accountants, please fill in our Client Agreement Form online.

If you are a contractor working through a limited company then visit SJD Accountancy (our sister company) who specialise in providing tax advice and accountancy services for Limited Company contractors. You can also keep up to date by following the SJD Accountancy Twitter

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*If you would like us to complete your company year end accounts we simply ask that you have been a client of Easy Accountancy for one year or have made 12 monthly payments.