Embracing Independence: Advantages of Being Self-Employed

This help sheet outlines what it means to work for yourself as a self-employed person. There are several tax advantages to being self-employed; however, you must also comply with various regulations, including tax laws.

Form of Your Business

When you decide to work for yourself, you need to choose the form your business will take. The most common forms are:

• Sole Trader: You run the business on your own, usually under your name.
• Partnership: You and one or more other people jointly run the business.
• Limited Liability Partnership: A special type of partnership that offers more protection from creditors.
• Limited Company: An organization that you own and control, carrying out the business on your behalf.

If you run your business as a sole trader or as a partnership, you are legally self-employed.

When you choose to run your business as a limited company you will normally be a director and an employee of that company. You will be employed rather than self-employed, but in practice, you will work for your own business.

It is important to understand the difference between being employed by your own company and being self-employed, as it will affect the tax you pay and the regulations you have to comply with. This helpsheet deals only with the advantages and regulations of being self-employed.

Tax Advantages – Cash Flow

As a self-employed person, you pay income tax twice a year on 31 January and 31 July. This allows you to retain your money longer than employees whose taxes are deducted under PAYE.

Ensure you have sufficient funds ready to pay your tax when due to avoid interest charges on late payments.

In the construction industry, you may have tax deducted from your sales invoices under the Construction Industry Scheme (CIS). You can reclaim some of the CIS deductions annually when submitting your tax return.

Expenses to Claim

You can deduct costs for goods or services used solely for your business from your sales revenue for tax purposes. For items used partially for business and partially for personal use, such as your car or home, you can claim the business proportion of the costs. Justify this with evidence like mileage or space used.

• Capital Allowances: From 1 January 2016, the first £1 million you spend annually on qualifying equipment (excluding cars) qualifies for 100% capital allowances in the year of purchase.
• Loan Interest: Interest paid on business loans can be deducted from your sales revenue, provided the loan was taken out for business purposes.

Government Support

If your area has been designated as a regeneration area, you may qualify for government-funded programs to help start your business. Charitable support is available from organizations like the Prince’s Trust for individuals aged 18-30.

If you’ve been jobless for at least six months, you might qualify for self-employment support; however, previous credits have been phased out.

Working and child tax credits are also available while running your self-employed business, based on family income and the number of dependent children.

Your Tax Obligations

Here are some Tax obligations

Tell the Taxman:

Register as self-employed with HMRC as soon as you start charging customers. You can register:

• Online at HMRC’s registration page
• By calling the tax office
• By completing leaflet CWF1 for registration

Every partner in a partnership must register separately. Failure to register by 5 October following the end of the tax year in which you started can result in penalties.

National Insurance

As a self-employed person, you must pay two types of National Insurance Contributions (NICs):

• Class 2 NICs: Currently £3.45 per week
• Class 4 NICs: 9% on profits between £12,570 and £50,270, and 2% on profits above £50,270.

Tax Returns for Tax Advantages

Complete a self-assessment tax return annually to report your business income and expenses.

Register for VAT

If your sales reach the compulsory VAT threshold of £85,000 in any 12 months, you must register for VAT within 30 days.