The Tax Advantages of Self-Employment

This help sheet outlines what it means to work for yourself as a self-employed person. Self-employment offers several tax advantages, but you must also comply with various regulations, including tax law.

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 of business 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 gives you and the other business owners more protection from creditors;
• Limited company – an organisation that you own and control, which carries out the business on your behalf.

If you run your business as a sole trader or 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 only have to pay income tax twice a year, on 31 January and 31 July. This means you can hang on to your money for longer than an employee who has tax deducted under PAYE from every pay packet.

You must ensure you have the money ready to pay the tax when it is due, as you will be charged interest on any tax paid late.

If you work in the construction industry, a contractor you work for may deduct tax from each of your sales invoices under the Construction Industry Scheme (CIS). You may be able to reclaim some of the CIS deductions each year when you submit your tax return.

Expenses to Claim

You can deduct the cost of any goods or services you use for your business from your sales revenue for tax purposes. Where an item is used partially for your business and partly for private purposes, such as your private car or home, you can claim the business proportion of the costs against your business profits. However, you must be able to justify the business proportion with evidence such as the miles driven or space used by the business.

• Capital allowances – if you purchase an item expected to last several years, such as a van, you can claim a special deduction known as a capital allowance. The first £25,000 you spend on equipment each year qualifies for 100% capital allowances in the year of purchase. This does not include cars.
• Loan interest – if you take out a business loan, you can deduct the interest paid on that loan from your sales revenue. The loan must fund your business, rather than personal expenses or credit card borrowing.

Government Support

• Government funding – if you live in an area in the UK designated as a regeneration area, you may qualify for a government-funded program to help people start their businesses.
• Charitable support – The Prince’s Trust offers support throughout Britain for those aged 18 to 30 who wish to start their own business.
• Self-employed credit – if you have been registered as unemployed for at least six months, you may qualify for a self-employed credit of £50 per week if you start your own business. Ask at your local Jobcentre Plus office for more details.
• Working and child tax credits – You may qualify for these while running your own self-employed business. Your tax credit award is based on your family’s joint income, including your self-employed profits, and will also be determined by the number of hours worked by the adults in the family and the number of children aged under 16.

Your Tax Obligations

Tell the Taxman

When you start your own business, you must register as a self-employed person with the Taxman (HMRC). It is best to do this as soon as possible after you start charging your customers for the goods you sell or the services you provide. You can register:

• On the HMRC website – http://www.hmrc.gov.uk/self-employed/register-selfemp.htm
• By telephoning the tax office on 0845 915 4515
• By completing the leaflet CWF1: Becoming self-employed and registering for national insurance contributions and tax.

You must register as self-employed even if you make a loss from your business. Every partner in a partnership business must register separately as a self-employed person. If you do not register with the Taxman by 31 January following the end of the tax year in which you started your business, you may be charged a penalty of up to 100% of the tax and national insurance you owe.

National Insurance

As a self-employed person, you must pay two types of national insurance contributions (NICs) known as class 2 and class 4.

Tax Returns

You must complete a self-assessment tax return every year to report the income and expenses from your self-employed business and any other income you have to the Tax Office.

Register for VAT

When your sales for 12 months reach the compulsory VAT threshold, you must register for VAT within 30 days.

How We Can Help You

We can help you register with the Tax Office for tax, national insurance, and VAT. We can show you how to keep accurate records for your business and complete tax and VAT returns. As your business grows, we can discuss tax planning ideas with you to ensure your tax bills are kept as low as possible.