self employed
Should you register as a sole trader or form a limited company?
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A key decision when starting a business is which legal structure do you choose when registering. The three most common options are sole trader, limited company and ordinary business partnership, although most people become a sole trader. Sole traders make up about 59% (3.5m) of the total UK business population of 5.9m, and they include many freelancers, contractors and agency workers.
Ordinary business partnership members make up about 7% (405,000) and basically these are sole traders who go into business together. The UK also has about 2m (34%) active private limited companies. So, why do so many people in the UK who work for themselves operate as sole traders?
What is a sole trader?
Being a sole trader is the same as being self-employed. In law, you and your business are the same thing, which makes you personally responsible for your sole trader business debts. If you don’t build up large debts and your business is successful, this won’t be an issue, of course.
To become a sole trader, you must register for Self Assessment (SA), the system (UK tax authority) HMRC uses to collect tax from sole traders. You’ll then pay Income Tax on your profits during the tax year (20%, 40% or 45% depending on your income/earnings). You work out your profits by deducting your expenses and any allowances from your income/earnings/sales.
Sole trader NICs
Most self-employed people pay their National Insurance contributions (NICs) via SA:
- Class 2 if your profits are £6,515 or more a year (£3.05 a week) and
- Class 4 if your profits are £9,569 or more a year (9% on profits between £9,569 and £50,270 and 2% on profits over £50,270 – all figures quoted are for the 2021/22 tax year).
Declaring sole trader earnings and VAT
Sole traders aren’t required to submit annual accounts to HMRC, but they must maintain accurate financial records (which can be checked) and submit details of their income and business costs in their annual SA100 tax return, which must be filed each year.
If your VAT-taxable earnings/turnover goes over £85,000 a year (the current VAT threshold) or you know they will, you must register for VAT. You’ll then have to charge VAT, collect it and pay it to HMRC. This also applies to limited companies.
The advantages of being a sole trader
It’s very easy to register online for Self Assessment so you can start your sole trader business. There are no costs and the process is very quick (minutes not hours or days). The tax admin is much easier when compared to a limited company, which means it can be done quicker. This saves cost, whether you do it yourself or pay an accountant to do it for you.
The paperwork and financial record-keeping requirements when you’re a sole trader are minimal; completing your SA tax return is more straightforward and any losses you make can be offset against other income.
Many customers won’t care whether you’re a sole trader or not, as long as your prices, products and/or services meet their expectations. In any case, you can easily change to a limited company structure later if you wish. And sole traders can employ others and their businesses can grow and prosper.
Being a sole trader can give you much more flexibility and control over your business, because you’re not answerable to shareholders – and you won’t have to share your profits with them either. You will enjoy more privacy, too, because the annual accounts of limited companies must be published on the Companies House website, which means anyone can view them. Sole traders do not have to publish their annual accounts.
Sole trader v limited company: which is more tax-efficient?
Example 1
Sole trader profit = £50,000 Net income = £38,717
Ltd co profit = £50,000 Net income = £40,109
Difference = £1,392
Example 2
Sole trader profit = £100,000 Net income = £67,752
Ltd co profit = £100,000 Net income = £69,469
Difference = £1,717
Example 3
Sole trader profit = £150,000 Net income = £91,723
Ltd co profit = £150,000 Net income = £92,057
Difference = £334
These examples assume that all profits are extracted from the business, salary up to Secondary National Insurance threshold (£8,840) is taken and the remainder paid as dividends (2021/22 rates).
Conclusion
As the above examples show, operating as a limited company can reduce your tax bill. However, if you need to pay an accountant each month to look after your tax admin and complete your annual accounts and Corporation Tax returns, in reality, any financial advantage as the director of a limited company can be minimal or non-existent.
Each year, hundreds of thousands of people in the UK who decide to work for themselves register as a sole trader and many go on to establish and grow highly successful small businesses. In many ways, being a sole trader is the easier and cheaper choice and it need not hamper your business or your ambitions.
About GoSimpleTax
Income, expenses and tax submission all in one. GoSimpleTax will provide you with tips that could save you money on allowances and expenses you might have missed.
The software submits directly to HMRC and is the solution for the self-employed, sole traders and anyone with income outside of PAYE to file their self-assessment giving hints and tips on savings along the way. GoSimpleTax does all the calculations for you so there is no need for an accountant. Available on desktop or mobile application.
Try for free – Add up to five income and expense transactions per month and see your tax liability in real time – at no cost to you. Pay only when you are ready to submit or use other key features such as receipt uploading and HMRC direct submission.
None of the content on this website, including blog posts, comments, or responses to user comments, is offered as financial advice. Figures used are for illustrative purposes only.
How to claim mileage allowance when you’re self-employed
If you use your own car for business, you may be able to claim a proportion of the actual total cost of buying and running your vehicle, including such things as insurance, repairs, servicing, fuel, etc. However, keeping track of every cost and working out the exact proportion of business use for your vehicle takes time and effort.
Instead, many self-employed people claim mileage allowance, a flat-rate scheme that provides a much simpler way to claim back the cost of using your own vehicle for business. Mileage allowance is part of a range of “simplified expenses” options that HMRC offers to self-employed people. They’re designed to make tax admin easier and quicker.
How much mileage allowance can you claim?
If you’re self-employed, you can claim a mileage allowance of:
- 45p per business mile travelled in a car or van for the first 10,000 miles and
- 25p per business mile thereafter
- 24p a mile if you use your motorbike for business journeys.
If you travel with someone else who also works for your business, as the driver, you can claim an additional 5p per mile for each extra passenger. So, if three of you travel together, you can claim 45p + 10p per mile (two x 5p per mile for the two additional passengers) for the first 10,000 miles, then 25p + 10p per mile thereafter.
Need to know! Claiming mileage allowance doesn’t stop you claiming for other business travel expenses, such as train tickets and taxi rides. Parking tickets and toll fees while on business can also be claimed as a legitimate business expense.
When can’t mileage allowance be claimed?
You can’t claim mileage allowance for personal journeys, they must be made “wholly and exclusively for business purposes”. And neither can you claim mileage allowance for journeys to and from your usual place of work (ie your commercial business premises). You can claim for travel to a temporary workplace, for example, if you’re a plasterer who needs to travel to different sites and jobs.
Need to know! You cannot claim simplified expenses for a vehicle you’ve already claimed capital allowances for or one you’ve included as an expense when you worked out your business profits. Where necessary, seek guidance from an accountant.
Working out your business mileage
Logging your business mileage is a good idea, as it can make it far easier to later work out and claim your mileage allowance. And your claim is more likely to be accurate and credible if HMRC can see precise details of dates, miles travelled, journeys and reasons. HMRC can request proof during an investigation.
Manually recording your business mileage takes more time and effort, while scraps of paper and notebooks can go missing, so it’s better to record and store your mileage details in a spreadsheet/software, with data stored safely online. Many apps have been created to help business owners track and record their business travel mileage (some even use GPS to automatically measure business mileage).
Some self-employed business owners simply estimate their business mileage, by claiming for a percentage of their vehicle’s total annual mileage. So, if your car does 1,000 miles a month and you can show that half of that is for business use, you can claim mileage allowance of 6,000 miles a year (ie £2,700).
How to claim mileage allowance
Good accounting software will do all of the hard work for you, saving you lots of time and hassle. You enter your business mileage and it calculates your mileage allowance, which you enter into your Self-Assessment tax return. The amount is taken into account and your tax liability is reduced as a result.
If you use simplified expenses to claim mileage allowance, you cannot claim for motoring costs such as insurance, road tax or fuel, because these are accounted for within the mileage allowance.
Need to know! Deliberately inflating your mileage allowance claim can lead to penalties. HMRC takes a very dim view of anyone who deliberately enters false information into tax returns.
Further reading
Visit government website Gov.uk to read Travel – mileage and fuel rates and allowances. There is also an online tool that enables you to Check if simplified expenses could save your business money.
Income, Expenses and tax submission all in one. GoSimpleTax will provide you with tips that could save you money on allowances and expenses you might have missed.
The software submits directly to HMRC and is the solution for the self-employed, sole traders and anyone with income outside of PAYE to file their self-assessment giving hints and tips on savings along the way. GoSimpleTax does all the calculations for you so there is no need for an accountant. Available on desktop or mobile application.
First 5 Steps to Self Employment
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For many people, becoming their own boss is the dream. They get to work in an industry they love, choosing their own clients and – better yet – their own hours. The only problem is that becoming self-employed isn’t that straightforward. At least, not on the surface.
After all, having to evaluate your income and manage your own tax affairs can be daunting. That’s why we’ve asked Mike Parkes from GoSimpleTax to help set your mind at ease, by providing his first five steps to self-employment.
- Register as self-employed
First things first, you need to let HMRC know that you’ll be paying your own Income Tax and National Insurance contributions (NICs) moving forward. You’ll need to do this as soon as possible – no later than the 5th October after the end of the tax year in which you first became self-employed. So, if you become self-employed between 6th April 2021 and 5th April 2022, you have until 5th October 2022. It’s a relatively simple process though. All you need to do is register on the GOV.UK website, or fill in an on-screen form to then post to HMRC.
- Get to grips with your tax bill
Next, it’s time to understand what tax you’ll be responsible for paying. First is your Income Tax, which is determined by your taxable income (that is, your earnings minus any allowable expenses and deductions). HMRC takes this information from your Self Assessment tax return and calculates your tax bill accordingly.
The amount of National Insurance you pay also depends on your taxable profit (income less expenses). Instead of the Class 1 NICs that employed people make, you’ll pay Class 2 (unless you earn less than £6,515 a year) and 4 (if you earn profits over £9,569 a year). See the effects of self-employed income tax and NICs at Employed and Self Employed.
- Choose the correct insurance cover
This largely depends on which industry you’re in, but there are some general policies that all sole traders should consider. For example, if you employ another person, even if it is just part-time support to help complete projects, you are legally obliged to take out employers’ liability insurance. There is a significant fine for sole traders caught failing to have this.
You should also consider taking out public liability insurance. This protects your business should a client, customer or member of the public decide to take legal action. In the event that they suffer an injury at your premises, or you suffer an injury at their premises, it would also provide cover for damage to property.
Finally, you should consider insuring yourself for professional indemnity. This is where you protect yourself from a client lawsuit levelled at you on account of them being unhappy with the work you have done or the support you’ve provided.
We would always advise that you seek specialist advice from a suitably qualified insurance broker to discuss your requirements.
- Identify any relevant tax relief in your line of work
Now you’re square with HMRC, and you’ve covered yourself legally, it’s time to enjoy the benefits of self-employment. All sole traders are eligible to claim relevant expenses to reduce their profits – and the lower the profits, the lower your tax bill will be.
After you’ve incurred the expenses, and inputted the total amount on the relevant tax return, just be sure to store the receipts somewhere secure should HMRC request them. Software like GoSimpleTax makes this easy, by allowing you to take a picture of receipts and save them together with invoices and bank statements in the cloud.
- Record income and expenses for your first tax return
A large number of sole traders log their income and expenditure towards the end of the tax year, causing unnecessary stress and a much longer tax return submission process. However, with real-time record-keeping, you can input this information throughout the year. This enables you to forecast your tax bill and better manage your cash flow. Again, with Self Assessment software, this takes no time at all.
In order to be successful as a sole trader, you need to be maximising your take-home pay and steering clear of HMRC penalties. By following the above steps, you achieve both. So, are you ready to finally become your own boss?
About GoSimpleTax
Income, Expenses and tax submission all in one. GoSimpleTax will provide you with tips that could save you money on allowances and expenses you might have missed.
The software submits directly to HMRC and is the solution for the self-employed, sole traders and anyone with income outside of PAYE to file their self-assessment giving hints and tips on savings along the way. GoSimpleTax does all the calculations for you so there is no need for an accountant. Available on desktop or mobile application.
Try for free – Add up to five income and expense transactions per month and see your tax liability in real time – at no cost to you. Pay only when you are ready to submit or use other key features such as receipt uploading and HMRC direct submission.
The IR35 changes: Who will be impacted by the reforms?
The off-payroll working (IR35) rules for the private sector have changed. These delayed reforms came into effect from 6 April 2021 and could significantly impact some contractors.
That said, according to research from EY TaxChat, very few contractors know what the changes actually mean for them. Of the 500 self-employed workers surveyed, only 14% claimed to be up-to-date.
At The Salary Calculator, we’ll have you clued up in no time at all. This article will explain:
- How the IR35 rules have changed
- Why the changes have been introduced, and
- What determines IR35 status
How have the IR35 rules changed?
The IR35 rules exist to ensure that contractors and those who hire them pay the correct amount of tax. It targets those who provide their services via an intermediary, such as a Personal Services Company (PSC).
The rules on who is classified as employed have not changed. However, the burden of responsibility for who determines this status has changed.
It is now the responsibility of medium-sized and large businesses to determine the employment status of a contractor.
These businesses must outline the reasons behind the contractor’s employment status in a Status Determination Statement. A contractor has the power to dispute this.
The changes do not apply to small businesses. To be classified as a small business, a business must have:
- A maximum annual turnover of £10.2 million
- A balance sheet total of £5.1 million or less, and
- 50 employees or less
IR35 does not apply to sole traders.
Why have the IR35 changes been introduced?
According to the HMRC, those who are “genuinely” self-employed should not be concerned by the changes. The new rules were introduced to ensure that more businesses are compliant with the law.
Specifically, the reforms seek to crack down on companies who hire contractors through “disguised employment” for tax purposes, which, according to HMRC, is rife. Data shows that only around 10% of Personal Service Company (PSC) owners have assessed their status as employed.
What determines IR35 status?
IR35 status is largely determined by the level of supervision, direction and control a contractor has.
So, if a contractor has the power to determine their working hours, with little or no oversight and only provides work outlined within the contract, they are likely to fall outside of IR35.
Other factors include whether or not the contractor provides their own equipment, if they are paid on a project-by-project basis, their level of exclusivity and mutuality of obligation (MOO).
It can be a bit of a minefield figuring out where you stand when it comes to IR35. But, don’t worry, there are resources out there to help.
HMRC has a tool called CEST which can help you work out whether or not IR35 applies. That said, it’s important to note that CEST should only be used as a guideline and does not provide a definitive answer on your IR35 status.
For more information about where you stand, head over to Employed and Self Employed to learn about the tax implications of different employment statuses.
Pandemic-related changes to tax return schedules
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We appreciate that it’s difficult to stay on top of tax law at a time of such uncertainty. That’s why we’ve asked Mike Parkes from GoSimpleTax to break down the biggest support package of 2020, and how it could impact you in 2021.
Whilst the support from the government has been welcomed with open arms, by most, it is worth noting that these grants are taxable. Each grant should be reported on your tax return, as income, in the accounting period they were received. This means there may be tax and NIC due on these payments and therefore it may impact your tax liability due 31 January 2022.
The extension of the Self-Assessment filing deadline
Sole traders were also made exempt from a late filing penalty, provided that they filed online by 28th February 2021. However, this has proved somewhat confusing as self-employed individuals were still expected to pay their tax bill by 31st January.
Any individuals that failed to do so would be charged interest from 1st February on any late payments. This became even more costly if you delayed your payment on account from July 2020 (another COVID-19 response measure), as the two payments were both due on 31st January 2021 and each accrued interest.
Important change to be aware of
In a further curveball announced 19th February HMRC confirmed that the initial 5% late payment penalty on self-assessed tax would not be charged as long as the tax is paid, or a time to pay arrangement is agreed by 1st April 2021. The self-assessment timeline is now:
- 31 January – Normal Self-Assessment deadline (paying and filing)
- 1 February – interest accrues on any outstanding tax bills
- 28 February – last date to file any late tax returns to avoid a late filing penalty
- 1 April – last date to pay any outstanding tax or make a Time to Pay arrangement, to avoid a late payment surcharge
- 1 April – last date to set up a self-serve Time to Pay arrangement online
If you’re unable to pay your tax bill in time, the government is advising you to pay in instalments. This enables you to spread the cost of your tax bill over a few months. Bear in mind that you must owe £30,000 or less and have no other payment plans or debts with HMRC. Your tax returns must be up to date, and you also have to sign up before 1st April 2021. It’s worth noting that you’ll have to pay interest too.
As there is currently no information concerning the rules for the fourth SEISS grant, we here at GoSimpleTax are urging all our users to submit their tax return immediately. After all, there’s a strong possibility that they could determine your eligibility, and you must do it in order to set up a payment plan.
About GoSimpleTax
GoSimpleTax software submits directly to HMRC and is the solution for self-employed, sole traders, freelancers and anyone with income outside of PAYE to log all their income and expenses. The software will provide you with hints and tips that could save you money on allowances and expenses you may have missed.
Try today for free – add up to five income and expense transactions per month and see your tax liability in real time at no cost to you. Pay only when you are ready to submit or use other key features such as receipt uploading.
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