This week’s blog is all about Self-Assessment. We have written about it before but this time we are addressing the subject in a question and answer format. With the end of the self-assessment tax year beginning to draw nearer you still have time to get your bookkeeping in order and put some money to one side for your tax bills. Now is the time to act if you haven’t already.

Do you have a specific question you need the answer to? Browse the questions below and go to the part of the blog that interests you most:

1. How much tax will I pay now that I am self-employed?
2. Do I have to pay National Insurance?
3. Can my home be classed as a business expense?
4. How do I register to become self-employed?
5. Can I claim for travel expenses?
6. How do I record business expenses?
7. What are the advantages and disadvantages of going self-employed?
8. How do I pay tax?

1. How much tax will I pay now that I am self-employed?

Once you are self-employed you get paid the entire invoice amount. So unlike permanent employment you do not get your tax and NI deducted from that total. This means that you have to avoid the temptation of taking the whole amount out and spending it as some will have to be put to one side to cover taxes at the end of the year.

As a general rule, we would recommend that you put 20% of everything you earn to one side. This amount should cover your tax and National Insurance (NI) easily. You will be able to adjust this figure over time as you get a better understanding of your tax liabilities.

Since your tax is based on profits made after allowable expenses, you need to be sure that you are claiming everything you are entitled to so that your tax bill isn’t larger than it needs to be.  Your accountant can advise you on this but as a rough guide, most direct business expenses are tax deductible.

2. Do I have to pay National Insurance?

Yes you do. As a self-employed individual it is your responsibility to make sure you pay your own tax and NI contributions.

The most common payments are Class 2 National Insurance (NI) Contributions, which are paid at a flat weekly rate of £2.75 (2014/2015), although if your annual profit is over £7,956 you fall into the Class 4 National Insurance Contributions category as well. If your profits are between £7,956 and £41,865 (2014/2015) this is an additional 9%, and any profit over £41,865 accrue an additional 2% to pay as well.

Your National Insurance contributions go towards state benefits that include maternity leave, pension, statutory sick pay and job seekers allowance. It is good sense to make your own arrangements for your income protection insurance and a personal pension that would go above and beyond a state pension.

Your National Insurance contributions are calculated alongside your tax so you will pay them when you pay your income tax. Class 2 National Insurance contributions will be paid either monthly or bi-annually by Direct Debit to Her Majesty’s Revenue and Customs (HMRC).

3. Can my home be classed as a business expense?

Yes it can. HMRC allows self-employed individuals to claim back expenses for a room in your home, for the hours you use it for business purposes. This means that you can make a claim for:

• Electricity
• Heating and water
• Council tax
• Mortgage interest

At the times you use part of your house as office space. You can work this out by taking into account how many hours a week you are using the space and then calculate the cost of the room per hour. The accounts will clearly state this usage as ‘use of home as office’ or something along those lines.

It is a complicated aspect of self-employment to work out, made easier with an accountant’s assistance admittedly. This tax deductible entry changes if you become a Limited company and continue to work from home. At this point we would advise getting an accountant’s assistance as they will give you the most up to date and accurate information.

4. How do I register to become self-employed?

The first stop is to register with HMRC. This is a priority because when you become self-employed failure to register this with HMRC within 3 months of starting out will potentially result in a penalty. It is very simple to do – the quickest way is to simply register online.

To enable an accountant or agent to complete this form for you make sure you have signed a 64-8 form (Authorisation for your agent). This form allows and enables your accountant to act on your behalf and deal with HMRC directly.

5. Can I claim for travel expenses?

Yes you can and you most certainly should. You can claim for your car, any rail travel and business related travel costs incurred during a business trip. Keep hold of all receipts and a detailed mileage record so you can prove the expenses and document them accurately in your tax return.

For more information on travel expenses and mileage allowances take a look at our Tax Data Card that contains all of the up to date stats for 2014-15.

6. How do I record business expenses?

As with most things in accountancy thorough records need to be kept. So for any kind of business expense, you need proof of purchase, usually by way of a receipt or a bank statement. These receipts are then added up at the end of the year and the total value is put on your self-assessment tax form. HMRC recommends that you keep your receipts for six years. However, it is admissible to scan them and store the records online. You can easily drop these files, once scanned, into a Dropbox, ICloud, or GoogleDrive account where they will be secure and take up considerably less space.

7. What are the advantages and disadvantages of going self-employed?

The advantages of being self-employed are:

• You are your own boss.
• You wear many different hats because you are in charge of finance, marketing, human resources, sales. There should never be a dull day!
• You can work when and where you choose to a routine of your choosing – that’s freedom!
• You can see the direct link between work effort and reward which sometimes is not visible to an employee.
• You can negotiate acceptable payment terms to suit your requirements.
• You can work for multiple clients at the same time, on many different projects, which can increase your earning potential and also the variety of the work you do.
• You may be able to command higher rates of pay depending on your skill level and the industry and market within which you work.

However, you also need to consider the disadvantages of taking on full responsibility for your earnings and having that level of freedom:

• You do everything yourself so you are responsible for the day-to-day demands and general running of the business.
• You will have to build resources and of course a team around you. At the start you will have to do every single task yourself ranging from cleaning the office, ordering in adequate stationary through to completing your bookkeeping and securing new clients/customers. There will be plenty of tasks that you have to do that you will dislike.
• It is rare to take away a large salary in the first few years – some months you might not even be able to afford a full wage for yourself.
• You may have to juggle two jobs at the beginning to fund the business and get it off the start line. It is common practice to continue with some form of employment to begin with so that you have a steady wage coming in that you can rely on.
• You need to offer a product or service for which there is demand. This may take you in a different direction than what you originally thought and it may also lead you to learn new skills to stay current and competitive.
• Too much expansion too quickly can be detrimental to a business as can too little.
• Working from home is the most cost effective way to run a business to begin with. If you work from other premises, you will need to pay rent and other overheads.

8. How do I pay tax?

Self-Assessment involves completing an online or paper tax return. You will send in information that tells HMRC your income and expenses, which ultimately gives them details of your profit figure. This is what they will tax you on. You will also give them full details of any other tax allowances or reliefs you are entitled to.

Those answers should give you a good grounding on all you need to know when approaching your self-assessment. If there is anything else you need to know or if you are contemplating going self-employed but want to talk things through, contact us on 01427 613613. You get a free 30 minute consultation so any concerns can be aired and alleviated before you take the plunge and start out on your own.