4.75 million people are now self employed, thats 15% of all people in work in the UK.
Why become self-employed – Citizens Advice
There is encouragement from the government for people to become self-employed and at first it seems attractive, especially if you have recently become unemployed or redundant. Although one of the main attractions of becoming self-employed is no longer having to work for somebody else there are several disadvantages you should consider. These include not being certain of having a regular income, having to arrange your own sick pay and pension and probably having to work long hours.
What should you do before you start your business?
- Create a business plan – research shows it will increase your profit by 20%
- Create a cash flow forecast – work out how much money you will need to run your business and where you will get the funding from
- Choose the right structure – its important to consider carefully whether to be a sole trader, partnership or limited company
- Talk to an Accountant – Accountants will help you register and set up your business and avoid the risk of penalties
- Market research – is there a market for your product or service, how big is the market and why will customers buy from you
You’re responsible for:
- keeping records of your business’s sales and expenses
- filing a Self Assessment tax return every year
- paying Income Tax on your profits and Class 2 and Class 4 National Insurance
- your business debts
- bills for anything you buy for your business
- registering for VAT if your turnover reaches the VAT threshold
- registering with the Construction Industry Scheme (CIS) if you’re a contractor or sub-contractor in the construction industry
Tax allowances for self- employed
Basically when you are self-employed you spend money on 3 types of expense:
- Capital expenditure – Equipment & Vehicles
- Business expenditure – stock, wages, premises
- Private expenditure – day to day living expenses – mostly not allowed but some types of cost may still count as business expenses
In general its types 1 and 3 where sole traders and partnerships miss out on tax allowances eg. cars
What about other equipment?
There is an Annual Investment Allowance (AIA) of £200,000. from 1st January 2016.
Which means when you buy most types of plant and machinery you can claim 100% of the value and use it to reduce your taxable profit in that tax year.
Working from home expenses?
From 2012-13 onwards, for payments of up to £4.00 per week, you don’t need to provide any records of the household expenses you’re claiming relief for. For amounts above £4.00 you will need supporting evidence to show that the amount you are claiming is no more than the additional household expenses you have actually incurred.
Pre trading expenses?
If you incurred expenses for the purpose of your trade prior to starting your business you can claim the expenses for up to 7 years prior to starting your business.
Seek advice from your accountant before you submit your Tax Return, it could significantly reduce your tax bill.