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FAQs about All

How much can I earn as a freelancer?

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If you freelance as a sole trader then your take home pay (after expenses) is essentially your profit, minus your tax and NI contributions.

Annual incomeAnnual 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

*This assumes you will claim 20% of your income as expenses

As your tax is based on your profits after allowable expenses, you must make sure you are claiming for everything that you are entitled to and your accountant can advise you of this.

Do I need an accountant?

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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.

What can I include as ‘expenditure’?

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Basically, anything which is a business cost is tax deductible. For example:

  • Stationery
  • IT equipment
  • Premises rental
  • Internet access
  • Marketing
  • Business phone bills
  • Travel to customer premises – e.g. a train ticket
  • Motor expenses – if you use your vehicle for both personal and business use then you simply reclaim VAT that relates to your business usage.

How do I make sure I put enough aside to pay my tax bill?

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If you are operating as a limited company, then there are very specific limited company tax rules. However, if you are operating as a sole trader then it’s all rather more flexible. You will need to pay tax twice a year, on 31st January and 31st July via what is known as ‘payments on account’, and your accountant will be able to advise you on this.

At the end of the tax year (5th April) you will need to provide your accountant with a full set of income and expenditure figures. From these, they will be able to work out your tax liability and will tell you what your payments on account will be for the following year. You will still need to fill in a normal personal tax return. The timescales for completion of your tax return are the same as for an individual – but the sooner you do it after 5th April, the sooner you will have an exact tax liability figure for the following year.

As a general rule of thumb, if 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. Don’t however make the mistake of not putting anything aside, as you will be in for a nasty shock when the bill comes in!

What about the Flat Rate VAT scheme?

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Another option to consider is the Flat Rate VAT scheme. As long as your turnover is less than £150,000 per annum, and depending on your business type, it is possible to gain financial benefits from registering for this. It provides a benefit because you charge at the standard rate (currently 20%) but you only pay at a lower rate. The difference is yours to keep, although you will be taxed on it as income. The Flat Rate scheme is also simpler to administer for you.

Take, for example, an IT freelancer who invoices £100,000 in a year:

  • They will invoice in total £100,000 + £20,000 VAT = £120,000.
  • However they only need to pay 10.5% of this total invoice (£120,000), so they will pay the government £12,600 in VAT.
  • The £7,400 difference is theirs to keep!

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.

What are the advantages of being VAT registered?

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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.

Will I have to register for VAT?

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No, not unless you hit the VAT threshold, which is currently £85,000 for the year commencing April 1st 2018. 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.

Will I need a business bank account?

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Technically no – but most people who set up a business of any type do generally choose to open a business bank account, to keep their business and personal finances separate. If you have never had one before, bear in mind that there may be charges for various things, like paying in cheques, so ask about these very carefully when choosing a bank. Some offer the first year free, but it’s worth shopping around to find the best long-term banking partner.

What do I do about National Insurance?

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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 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 – e,g, if you are freelancing whilst still in permanent employment you should take care to ensure you are not paying more in NI contributions than you need to! If you think you may be exceeding the upper limit then you can apply for deferment of contributions.

Do I have to register my business name with Companies House?

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If you are operating your freelance business as a sole trader then no. As a sole trader you can choose pretty much any name you like, but once you register the name as a formal business entity there will be some restrictions – so even if you are only setting up as a sole trader now, you might want to register your name straight away, to protect it in the future if you do choose to go limited at a later date. Also, by registering your name you will make your details present at Companies House, which provides credibility and helps to build client confidence.

I want to try freelancing, but without giving up my day job straight away. Is that possible?

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Yes, of course it is. Though we would always advise that you make your employer aware of what you are doing in case of any potential conflict. Providing your employer is OK with it, and you have no nasty clauses in your contract, then you will be fine. Indeed freelancing part time could even be an excellent way to start!

What if the company doesn’t take off or I no longer need it?

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A Limited company that has not traded for at least three months can voluntarily apply for Companies House and HMRC to remove their company from their register. This can be done by filing a 652a form.

Do I have to trade immediately?

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No. Your company can remain dormant (non – trading) for as long as you wish, however you must file dormant account forms with both HMRC and Companies House along with an annual return form (Form AA02) with Companies House, again we can help you with this.

What information do I need to set up a limited company?

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To set up a limited company you will need…

  1. A company name- visit Companies House name page to check availability.
  2. The company address (most people use where they live), a registered address (if different from company address) and the Director’s basic details such as title, name, date of birth and nationality.
  3. Total number of shares and shareholders – as a standard procedure we recommend that as a single person limited company you allocate yourself one share.

Your accountant will be able to help form your limited company, Visit the Supplier Directory to find a suitable Accountant.

You will need to have some insurance but only to cover what’s in your contract. Visit the Supplier Directory to find suitable business insurers.

Do I need a company secretary?

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No. Since the 6th April 2008, it is the choice of the limited company director whether or not to have a company secretary. It is no longer a mandatory requirement, most new single person companies don’t have one as there is no work for them.

Do I have to submit any documents annually?

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Yes- you must provide a number of documents following your “Annual Reference Date” (ARD). This date is usually the last day of the month your company was incorporated and occurs each year, it is the date that your financial years ends where the accounts are not made up. You have 9 months from your ARD to return the following documentation to the Companies House.

  • Abbreviated accounts- the deadline is 9 months and 1 day from the year end.

You will also need to submit the following documents to HM Revenue and Customs:

  • Full accounts.
  • CT600 – This is a corporation tax return, the deadline for payment for corporation tax is 9 months and 1 day from the year end.

Plus you’ll have to make a few submissions here and there to HMRC every so often; however most things are fairly straight forward and your accountant will help you at every stage.

When will I need to charge VAT?

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You will not need to charge VAT to any of your goods or services until you have reached the VAT threshold amount of £85,000 (As of 1st April 2018) or if you expect it to reach £85,000 in the next 30 days then you must register for VAT.

Once over the threshold amount it is mandatory that you immediately register for VAT, and start charging interest to your goods and services from the day you registered. As a limited company there are various schemes that may work best for your business. Visit the following pages for more information:

What kind of accounts and records must a limited company maintain?

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All companies are required by law to keep a full record of income, expenditure, assets and liabilities. These records must be kept safe as they will assist you and your accountant when submitting company’s annual accounts. Visit the following page to download our free bookkeeping template.

Who can set up a limited company?

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Any individual of any nationality may register a limited company subject to a few conditions:

  • They have not been restrained by court order.
  • They are not subject to UK Government restrictions.
  • They are not an un-discharged bankrupt.

However, if you also require a UK business bank account you may find this difficult if you live somewhere else.

What are the advantages of trading as a limited company?

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Other than it being the most tax efficient way, with more tax planning opportunities than being self employed, perhaps the most attractive benefit of trading as a limited company is the aspect of limited liability…

  • Being Limited means essentially this protects the personal assets of the officers should the company run into financial difficulty.
  • Many of the costs and administrative requirements associated with running a limited company are now not much more than those of a sole trader or partnership (it didn’t used to be this way but the Government has made huge strides in helping small limited business develop).
  • Limited companies also instill added confidence in suppliers and creditors; many large organisations will only conduct business with limited companies.
  • The ownership of a limited company can be easily divided up through the sale of shares.
  • The shares can be further used as a means of generating capital i.e. selling shares in your company.

The tax implications of trading through a limited company as opposed to as a sole trader or partnership are quite complicated but we do have a great page for sole trader or limited companies that we would recommended you read. Having a limited company for some is viewed as an “insurance policy”, especially for a new or high risk business, ensuring that you do not risk your personal assets on a speculative venture.

In addition to limited liability, a limited company has the following advantages:

  • You can give a share of the business to others, e.g. family, but if they receive dividends you’ll need to be able to justify the work they do if investigated by HMRC as every time you make a dividend payment (you can make these whenever you wish) they will also receive a percentage. For example husband and wife: if the wife has 80% and the husband has 20% and they draw a dividend of £1,000 the wife will receive £800 and the husband £200.
  • It may be easier to attract people to invest money in your business.
  • Obtaining bank loans may be easier.
  • In the event of a partner leaving, it is easier to continue the business.
  • Limited companies offer better tax planning opportunities – for example every penny you earn in a tax year as a sole trader will be taxed that year, however with a limited company you can store money in your company and take in future years.
  • It is easier to sell the business.
  • You have a better standing in the public eye.
  • It can assist in the protection of a name.
  • People have more confidence in your business as they can check up on your company, on the public records, on Companies House.
  • Contractors and Freelancer’s may find it easier to obtain work.

What is a limited company?

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A private limited company (LTD) is “an individual legal entity which is separate from that of its officers”(technical speak for the people who run it). A limited company has its own assets and liabilities, profits and losses. The liabilities are limited to the company – in other words, the owners are protected from financial liability should the company encounter any difficulty. This is different from that of a sole trader or partnership, where the assets and liabilities of the business belong to the individuals.

For example if you are a sole trader window cleaner you’ll more than likely own your ladders, the same goes if you were an IT freelancer you will own the hardware. However if these two individuals traded through their own limited company, the company will more than likely own the assets i.e. ladders and hardware.

Ownership of a limited company is through issuing shares, in small owner managed businesses the shares are usually owned entirely by the Directors. Limited companies must also submit annual accounts to Companies House each year which are made available to the general public (an accountant will usually do this for you.

Use our best option tool to help find a suitable Accountant.

How do I reclaim VAT on my purchases?

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Every quarter (every 3 months) you would fill in your VAT return form (online only) and submit this to HMRC. This must show all your output tax-this is the total VAT your company has charged your customers on products and services which you have provided. You also include the VAT charges you have incurred on purchases for your company such as supplies, equipment, stock etc, this is known as input tax.

HMRC will then review your VAT form and should your outputs exceed inputs, you must then pay the difference to the government, however if your inputs exceed the outputs your company is then entitled to a refund.

If on the Flat Rate Scheme you cannot reclaim on VAT unless you have done a bulk purchase, on one invoice/receipt which at a cost of £2,000 or more.

Flat rate scheme, how does it work?

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The flat rate VAT scheme is an incentive provided by the government to help simplify taxes and means you charge VAT on your invoices at 20% (2013) but only pay back HM Revenue and Customs at a lower rate. It is the scheme that is recommended for businesses that have very few VAT chargeable purchases and expenses i.e. don’t buy much stock.

Important notes about the FRS:

  1. If you estimate that your annual turnover excluding VAT will exceed £150,000 in your first year, you shouldn’t join the scheme.
  2. If your annual turnover exceeds £230,000 of VAT inclusive revenue in subsequent you must come off the scheme.
  3. Companies on the flat rate scheme are unable to claim back any VAT on purchased goods and expenses for their business. You can however reclaim VAT on capital asset purchases over £2,000, for example a PC. Providing all the capital purchases are on the same receipt such as a PC, printer and scanner you can claim the VAT back on these items. You cannot however buy a PC one month for £1,500 then a printer the next month for £300 and a scanner the month after for £200 and add them together, they must all be on the same receipt.

Like standard VAT, the flat rate scheme still requires you to complete a quarterly VAT return form (online only). You will need to charge the standard VAT rate, currently 20%, (2018) to your invoices, however…rather than accounting for the VAT on every payment, when you do your quarterly report you will only pay a single flat rate percentage on your turnover of each quarter.

The VAT percentage you pay is considerably lower than that of the standard VAT rate, 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

For more information on this scheme, visit our Flat Rate VAT Scheme Guide.

How often is VAT paid?

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Every quarter you will need to fill in a VAT form (online only) to HMRC.

Can I register for VAT even if I am not at the mandatory threshold amount?

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Yes, some businesses feel that having a VAT number adds a certain credibility and prestige to their company, so they voluntarily register for VAT.

When do I charge VAT on my sales and other supplies?

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You begin charging VAT on all sales and invoices from the day you register for VAT.

So, for example, if you register for VAT in April, but do not receive your VAT registration number until May, you would still start charging VAT on goods and services provided from April.

It can take up to 30 days before you receive your VAT registration number and certificate, so within these 30 you will still need to charge standard 20% VAT (2018) onto all invoices raised. Once your VAT number is received you will then need to include your VAT number onto invoices raised within this time.

How do I register for VAT?

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Once you are at the required threshold amount or if you have voluntarily registered for VAT (more on this later) you will need to fill in the VAT registrations forms on the HMRC website. You will then receive a VAT registration number, which you will need to add to any raised invoices and a confirmation certificate.

When do I have to register for VAT?

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If in the previous 12 months your turnover has reached the VAT threshold amount of £85,000 (As of April 2018) or you expect your turnover to reach £85,000 in the next 30 days then it is mandatory that you must register for VAT.

If you are under the VAT threshold amount of £85,000 then you do not have to charge VAT on your goods and services. The threshold amount can change so make sure to check the HMRC website each year to ensure you are not over or under this amount.

What is VAT?

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VAT stands for Value Added Tax. If you are VAT registered you need to add 20% (2018) on top of whatever you sell. To make things a little more complicated there are certain things that are zero rated like: food, books, newspapers and magazines, young children’s clothing and footwear but I wouldn’t worry about these for now.

What is a P35?

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A P35 is a yearend return completed by all employers. The P35 is a summary of the deductions made from the employees’ salaries reconciled to the payments made to HMRC during the tax year. Any difference in the reconciliation between the PAYE payments due and actually paid can then be identified. The P35 is completed for each individual tax year and is submitted to HMRC together with the employees P14 (The P14 is similar forms to that of the more well known P60).

The P35 must be submitted to HMRC no later than 19th May after the previous tax year. The P35 can be submitted using the HMRC website, direct from the payroll software or by paper if allowed.

What is the difference between a P45 and a P46?

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You get a P45 when you leave employment and you complete a P46 when you start employment should you not have a P45 from a recent previous employer.

Your P45 will show various pieces of information including your PAYE reference code and how much you earned and paid in tax during the tax year. Your P45 will be in 3 parts. When you find another job you should give parts 2 and 3 to your new employer. This will allow them to see how much tax you have paid and put you on the correct tax code. Often people lose their P45 or forget to give it to their employer. When this happens the employer is forced to put you on an emergency tax code which often means that you end up overpaying tax until you claim a tax refund at the end of the tax year.

If you do not want to show your employer your P45 because you want to keep your previous wage confidential then you can get around giving them your P45 by sending parts 2 and 3 to your tax office telling them where you are working. You should make sure that you do this as soon as possible otherwise you could be put on the wrong tax code.

If you lose your P45 or were not given one by your employer, because they say, went bankrupt. You can give your new employer a P46 instead. You need to complete the P46, and once you have, give it to your new employer so that they can put you on the right tax code.

What information do I need to process an employees pay?

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The only information you need to set up a new employee on the payroll would be:

  • Title
  • Full name
  • Address
  • NI number
  • Date of birth
  • Start date
  • Payroll frequency
  • Tax code
  • Job title
  • Annual salary or Hourly rate of pay

When paying an employee, what is the cost to the employer?

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You take the gross amount, plus the employers National Insurance. This is 12.8% of the gross annual wage less the National Insurance threshold of £5,715.

For example: If you were doing payments on a monthly basis and the gross monthly wage was £1,000 to your employee you would deduct £475 (this is calculated over a 12 month period) which gives you £525.
12.8% of £525 is £67.20. This is how much you as an employer would pay in National Insurance. As long as the salary is the same every month and is paid for the whole tax year.

How do I pay HM Revenue and Customs?

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To pay HMRC there are 6 methods which they recommend using to ensure your payment reaches them.
HMRC recommend payment methods 1-5 below, these are the most secure and efficient.

  1. By direct debit: You will need to set this up through www.hmrc.gov.uk and select paye for employers and the do it online menu. Log in on the welcome to the online service page and select Direct Debit payment from the Main Menu. If you are a new user you first have to register and enrol for the PAYE for Employers service.
  2. Direct payment: Use the internet, telephone, BACS Direct Credit or CHAPS to make payment. Provide your bank or building society with the payment amount, HMRC bank account details and your Accounts Office reference.
  3. BillPay: You can pay by Debit Card or Credit Card over the Internet. Visit www.billpayment.co.uk/hmrc/scripts/index.asp and follow their guidance.
  4. Your bank: If your bank offers this service, take the payslip and payment to any branch of your bank. Any cheque must be drawn from your bank and made payable to ‘HM Revenue and Customs only’. Other banks may refuse to accept payment.
  5. Post office: Take your Employer Payslip Booklet along with your payment to any participating Post Office. If paying by cheque, make your cheque payable to ‘Post Office LTD’. The post office will also accept payment by Debit Card.
  6. By post – If you use this method:
  • Make your cheque payable to ‘HM Revenue and Customs only’.
  • Include your payslip reference after ‘HM Revenue and Customs only’.
  • Send the payslip and your cheque, both unfolded, to the Accounts Office.
  • A stamp for the correct postage is required.

How do I set it up?

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The easiest way to set up payroll is to ask your accountant to help you, failing this you can go on to the HMRC website and fill in the forms, which includes basic information about your company, directors or proprietor’s details and registered address.

They will get back to you with a reference number for PAYE and an accounts office reference number- you need to use this number when you make payments of the PAYE and National Insurance. The PAYE number is used when the yearend payroll is completed; it will also indicate which PAYE office you belong to. Once you have these details you can start running payroll.

When should payroll be paid?

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In regards to salary it can be weekly, fortnightly or monthly- it can be paid whenever you choose.
With income tax and NI this has to be paid either monthly or on a quarterly basis. Your payroll can be done quarterly if the monthly due figure is not more that £1,500. If it is over £1,500 it has to be done monthly.

The money you need to pay to HMRC is always due on the 19th of the following month. For example if you have just had the June payroll, the money due will be by July 19th.

For a quarterly payroll, it always runs per tax year (from 6th April 2018 to 5th April 2019) and there are four set quarters in each tax year, always as follows:

1st quarter – April, May, and June – pay PAYE & NI by 19th July.
2nd quarter – July, August, and September – pay PAYE & NI by 19th October.
3rd quarter – October, November, and December – pay PAYE & NI by 19th January.
4th quarter – January, February, and March – pay PAYE & NI by 19th April.

How do I pay myself through the company?

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Typically as a limited company you will pay yourself from your own company by way of a salary, plus if you make a profit you will also pay yourself by dividend. If you are paid as salary from your own company normal PAYE rules apply. Income tax and employees National Insurance is taken out of your gross salary to give you a net salary and you as the employer pay employers NI.

How do I make a claim to have penalties removed?

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To make a claim, write to your local Tax Office and give the following details:

  • Your name and Unique Taxpayer Reference – you’ll find this on documents such as your tax return or Self Assessment Statement.
  • The date you sent your return.
  • The reason why the return was late.

Of course, you can also ask your accountant to assist with this, should such a situation arise which is outside of their control

Is there any way to avoid the penalties if I send my Tax Return in late?

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You have to have what is considered to be a ‘reasonable excuse’ for missing the deadline. There are no fixed rules on this, but usually any delay must be due to an exceptional or major unexpected event that’s completely outside your control. Some examples of what HMRC may consider as a ‘reasonable excuse’ include:

  • Documents being lost through theft, fire or flood leaving you unable to replace them in time.
  • Life-threatening illness, for example a heart attack or an extended hospital stay which prevents you dealing with your tax affairs on time.
  • The death of a partner shortly before the filing date – where possible, you may need to demonstrate that you had taken steps to prepare the return on time before this happened.
  • Long term industrial action by Royal Mail.
  • Problems with the online filing service, where no alternative option was available – for this, you’ll need to provide copies of any error messages you received, so take ‘screen grabs’ using Ctrl/Print Screen wherever possible.

If you have a ‘reasonable excuse’ then you can ask for the penalty to be reconsidered, and HMRC will look at the information you provide, and any other evidence that’s available, in detail. But don’t wait until you receive the penalty notice, instead make any claim as soon as you possibly can.

How do I make sure I put enough aside for tax?

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As a general rule of thumb, anyone setting up as a self employed person for the first time should expect to reserve around 30% of their total income to set aside for tax and national insurance payments. If you do this you should always have enough money available to pay those bills. Failing to reserve funds for tax bills could leave you in a situation where you do not have enough money to pay HMRC and this could result in the end of your business!

How do I submit my tax return online?

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To file your return in this way, you’ll need to register online and request an ‘activation PIN’ from the HMRC website. To do this, you’ll need your Unique Taxpayer Reference (UTR), which you’ll find on form SA100 of your tax return, as well as your National Insurance Number or postcode. It can take up to a week to receive your account password and become fully registered, so don’t wait until the last minute! Once you have completed your form, just make sure you print a copy off or save one on your computer, so you can still refer back to it if necessary.

Is it better to send it by post or do it online?

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In 2009 over 5.8 million people filed their Tax Returns online, and this was a record total with a 50% increase on 2008. There are many benefits to doing it like this, and accountants will also usually do it this way also if you provide the information on time. In summary, these benefits include:

  • No hassle with paperwork.
  • No danger of it getting ‘lost in the post’.
  • You get an extra three months to complete the Tax Return.
  • You receive an immediate acknowledgement, so you know it’s arrived safely.
  • You can save the form as you go along, so you don’t have to complete it all in one sitting.
  • HMRC software can automatically calculate your tax for you.
  • If you are owed any money by HMRC, you’re more likely to get it sooner because your form should be processed more quickly!

If you are sending your Tax Return by post, make sure you double-check that you’ve signed and dated everything, and that you have included all of the additional pages you need to. This is essential, whether you have completed the forms or whether an accountant has done so on your behalf. It’s still ultimately your responsibility to make sure you have sent in everything that you need to send.

And finally, remember to take a photocopy of the whole thing in case it gets lost in the post. You accountant should do this as standard, but if you’ve completed it yourself then this is vital. HMRC won’t acknowledge that they have received your forms, but they will let you know when everything has been processed.

Is there a way to make filling in my Tax Return easier?

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Even with all of the guides and online help, filling a Self Assessment Tax Return can be incredibly daunting, as sometimes even the questions don’t make sense if you’re not a tax expert. This is why most self-employed people usually look to an accountant for help.

Visit our Supplier Directory to find a suitable accountant.

What happens if I make a mistake or send incorrect information?

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If any of your personal details have changed, or if you find that you (or the Tax Office!) has made a mistake, then you must let HMRC know as soon as possible. You can be penalised if your Tax Return is incorrect through fraud or negligence – for example of you provide incorrect figures on purpose – then you could end up with a criminal conviction if you try to ‘cheat’ the tax system. All in all it’s best to get it right first time if you possibly can!

Will I be sent a form automatically or do I have to request one?

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Self Assessment Tax Return forms are issued after the end of the tax year – which is 5th April – and cover the previous 12 months. You will receive one as standard if you have registered as self employed, which you should have done when you set up the business. If you do not receive one for any reason, then don’t think you’ve ‘got away with’ and don’t have to complete one. HMRC will catch up with you eventually, so you might just as well ask them to send you one. It’s your responsibility to do so.

Is it better to do my Tax Return as soon as the tax year finishes, or wait?

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You will save yourself a huge amount of headaches and sleepless nights worrying if you do it sooner rather than later. There’s nothing to be gained by leaving it until the last minute – and it certainly won’t delay the date on which you have to actually pay the tax.

Leaving your tax return until the last minute not only causes more headaches and stress as the deadline approaches, but it also leaves you in a situation where there will also be no time to correct mistakes, or to ask for help if you have any problems. Which is why we would always encourage you to complete your Tax Return as soon after April 5th as possible. If you miss the final deadline then you could face a £100 fine, and if you don’t pay your tax bill by the correct date, you could start paying further penalties and even interest charges.

What personal information to I have to include in my Tax Return?

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Although you are now operating as a business, and your income is based on the profits of that business, you are in effect completing a ‘personal’ tax return. So you’ll also need to make sure that you keep details of all other aspects of your income, if relevant. For example, if you set up the business halfway through a tax year, you’ll need details of your salary and your tax payments to date on PAYE. This should all be contained in the P11D and P45 which you should have received from your employer when you left.

Other personal income could include interest on savings, income from property rental or a part-time job, or any other income sources you might have – maybe, for example, if you were working on a more casual basis in the evenings before you set up the business?

What records do I have to keep?

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By law, everyone must keep records of their income, and of any ‘capital gains’, for at least 22 months after the end of the tax year – and if you are self-employed as a sole trader, you’ll need to keep these records for at least five years and ten months after the end of the tax year.

We’d always recommend that you manage your finances in an organised fashion from Day One – in fact, as a self employed person it’s a legal requirement. That doesn’t necessarily mean investing in expensive accounting software, unless you feel you really need it – but instead, at a most basic level, keeping a record of every payment you receive from a customer and every business expense you have. If you enter everything into a simple spreadsheet in Microsoft Excel, you’ll always know where you stand.

You’ll need to keep copies of every invoice or sales receipt and every expense receipt. Keep these somewhere safe, filed either by month or by customer – whichever works best for you – and make sure that you can find any individual piece of paper whenever you need it.

Downoad our free Bookkeeping Spreadsheet

What do I have to pay tax on?

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Your tax bill will be calculated based upon your business profit. Simply put, that means everything you earned minus everything you spent. More specifically – everything that was a ‘business expense’.

Construction Worker Tax Returns

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As a self-employed construction worker or mechanic, it’s likely you’re busy enough doing the day to day, never mind spending your time completing your tax return.

Luckily, our sister company, Brian Alfred, specialise in tax returns and tax rebates for builders and mechanics.

What are the deadlines for sending my Self-Assessment Tax Return?

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If you are submitting a paper return, it must reach HMRC by midnight on the 31st October. If you decide to send your tax return online, it isn’t sure until midnight on the 31st January.

You will be charged a penalty if your Tax return isn’t received on time. When you send HMRC a Self-Assessment tax return, you will receive a Self-Assessment statement showing what tax you owe and how to pay. If you have paid too much it will show how much you will be repaid. If you file your Tax Return online, you can view this before you even receive it in the post.

What forms are included in a Self-Assessment Tax Return?

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Self- Assessment Tax Returns are designed to be relatively straight forward, although most people opt to use an accountant. The forms you need to fill in if you are self-employed are as follows:

  • HMRC will send you a tax return- or a letter telling you to file online, every year in April. This relates to the previous tax year; from the 6th April to the following 5th April. If you receive a tax return,
  • HMRC will always send you form SA100 and SA101. You may also have to file in some supplementary pages, depending on your circumstances.

For example:

  • If self employed either pages SA103S, if your annual turnover was below £68,000 or SA103F is your turnover was over £77,000.
  • If self employed in a business partnership you will also need to complete either SA104S (for partnerships that have only trading income) or SA104F (for all other types of partnership income). These forms detail your share of the partnerships profit and loss.

If I’m self-employed what Tax Returns do I need to submit?

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If you are self-employed, you have to fill in a Self-Assessment Tax Return every year. HM Revenue and Customs will send you the paper forms you need, or you can complete your tax return online.

You will be asked for details about profits from your business and any other income that you have to pay tax on, such as rental income. This is used to work out how much tax and National Insurance Contributions you have to pay. You must provide the correct information and return this to HMRC on time. You must keep all of your records so that you can fill in your tax return fully and accurately. The more detailed records you keep the easier it will be to answer any questions HMRC might have.

What penalties could I face if I do not file my Company Tax return on time?

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HMRC will usually send your company letter telling you that you need to file a company tax return. HMRC calls this letter a ‘Notice to deliver a company tax return’. If HMRC has sent you this notice and you don’t file your return on time, your company will be charged a penalty. You will be charged a flat-rate penalty of £100. HMRC will charge a further £100 penalty, if you file your return more than three months late.

If your company tax return is late for three or more accounting periods in a row, the initial flat-rate penalty increases to £500 with a further £500 charged if you file your return more than 3 months late.

Additional penalties for very late company tax returns:

  • 18 months from the end of your corporation tax accounting period.
  • Your filing deadline.

HMRC may charge your company, further penalties from that date. These penalties will be on top of the flat-rate penalty or penalties you’ve already been charged. These additional penalties are known as tax-related penalties because they are related to the amount of corporation tax your company owes. They are calculated as follows:

  • Where a tax return is filed between 18-24 months after the end of your company’s accounting period = 10% of any unpaid corporation tax.
  • Where a return is still not filed 24 months after the end of your accounting period = a further 10% of any unpaid corporation tax.

The amount of unpaid corporation tax is the amount due that you didn’t pay by the date your company first became liable to a tax related penalty.

What are the deadlines for filing your Company Tax Return?

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You must file your company tax return- which includes a company tax return form and other supporting documentation- within 12 months of the end of your companies corporation tax accounting period. Your company tax return filing deadline is known to HMRC as your ‘statutory filing date’. If you file your return late your company will be charged an automatic penalty, even if it does not owe any corporation tax.

What happens if I don’t pay my Corporation Tax on time?

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If you don’t pay your corporation tax on time, known as a late payment, or you do not pay enough (underpayment or non-payment), HMRC will charge your company interest. Late payment interest is charged from the day after the tax should have been paid (normally 9 months and one day after the end of the accounting period) until the date you pay it. Interest charges are automatic, however, interest is not charged on interest itself. Any late payment interest you pay to HMRC is deductible for tax purposes.

How do I pay Income Tax?

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Income tax can be paid in various ways depending upon the type of income and whether you are employed, self-employed or not working. The different ways Income Tax is collected include:

PAYE (Pay- as- you-earn).

  • Self-Assessment.
  • Tax deducted ‘at source’. Whereby tax is deducted from your bank/building society interest before the interest is paid to you.
  • In some cases, a one off payment.

If you are an employee or you receive a company or private pension, your employer or pension provider will deduct tax throughout the year using the tax code HM Revenue & Customs (HMRC) provides them. This is known at the Pay As You Earn system (PAYE).

If you are self-employed, you will be responsible for filling in a Self-Assessment Tax Return which can be done either online or by filling out a paper form. You will probably pay your income tax in two instalments plus a third final ‘balancing payment’

What are the most common reasons to fill out a Tax Return?

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The most common reasons to fill out a tax return are:

  • If you are self-employed (including being in a partnership).
  • If you are a company director or a minister of religion (bet you didn’t know that).

Although, if HMRC ask you to complete a tax return you must do so. This will normally be to make sure you are paying the right tax and getting the right allowances.

If you don’t already complete a tax return form, you’ll need to do so if you receive any of the following:

  • Income from savings and investments of £10,000 or more.
  • Income from untaxed savings and investments of £2,500 or more.
  • Income from property (before deducting allowable expenses) of £10,000 or more.
  • You receive income from overseas
  • Income from the estate of a deceased person on which tax is still due.
  • If you or your partner receive child benefit and your income is over £50,000.

Do I need to complete a Self Assessment Tax Return?

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If you do not pay PAYE i.e. are not a permanent employee you’ll need to fill out a self-assessment tax return. Also if you have a second income from overseas income, you’re a landlord or you have income from savings or investments. In a nutshell if you have any income that HRMC needs to know about you need to fill out a self-assessment form.

I’m a CIS worker, can I claim expenses?

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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.

When do I have to charge VAT?

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You will not need to charge VAT on any of your goods or services until you have reached the VAT threshold amount of £85,000 (as of 1st April 2018). 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.

How do I pay tax?

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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.

What are the advantages and disadvantages of going self employed?

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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.

How do I record business expenses?

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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!

Can I claim for travel expenses?

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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.

How do I register as self employed?

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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.

Can I claim the use of my home as a business expense?

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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 Self Employed Expenses.

Do I have to pay National Insurance?

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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).

How much tax will I pay being self-employed?

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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 incomeAnnual 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.

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