Self-Employment: Professional Freedom Or Tax Headache?
As with most things in life, being self-employed has its advantages and disadvantages. Being your own boss can be a liberating and very satisfying experience, but on the downside you have to work longer hours and keep the plates spinning. And then you have the tax headaches that come with being self-employed.
The majority of business owners agree the advantages outweigh the hassle. To run a successful business on your own, you need to have a strong personality, be prepared to work hard, stay focused and determined and have a good business plan. Fortunately, professionals, friends and associates can help you devise a business plan.
Sole Trader, Partnership or Limited Company?
There are three ways in which you can be self-employed; sole trader, partnership and limited company. A sole trader means that you are the business. You have no employees. A partnership is essentially very similar to being a sole trader, except with more than one person. A limited company is a little more involved as the business becomes a separate legal entity. You are classed as an employee of the company and company money is not strictly your money, so there are stricter requirements for accountancy and record keeping.
Unless you have a substantial initial investment then being a sole trader is probably the easiest introduction to being self employed. You can easily change to a limited company at a later date. The decisions you make in the early stages are critical and provide the grounding for your business so making the correct decisions now will help any future growth go far smoother. Every business has different circumstances so if you are unsure what is the best way for you to progress you should seek professional advice.
What about HMRC?
When you first become self-employed there are certain things you must do in order to avoid HMRC fines. Firstly you need to register to pay class 2 National Insurance Contributions either by phoning HMRC or by completing form CWF1 and sending it by post. You have three months from when you begin trading to inform HMRC. Failure to do so will incur a penalty.
Registering to pay your class 2 NI will automatically generate a UTR (unique tax reference). Your UTR becomes your new self-employed reference for all correspondence between you and HMRC, with the exception of certain extreme circumstances such as bankruptcy, your UTR is yours for life. To register you will need your NI number, date of birth and your full name and address. In addition to these they will also want to know what your main business activity is going to be, this is mainly because if you are going to subcontract then the CIS scheme will apply.
Record keeping and bank accounts
It is important to record all sales and purchases from day one. This should also include any setting up costs such as stationery, telephone, adverts, stock, motoring, postage and premises costs.
If you are setting up as a sole trader then a separate business bank account is not essential, but it is recommended. Many shy away from this due to the additional charges, although these are a legitimate business expense and will gain tax relief on them. Keeping your business bank separate from your private banking will also simplify your bookkeeping and accountancy.
Self-employment tax advice
If you are considering becoming self-employed, Taxaccolega, a low fixed fee accountant, can offer professional advice about your tax liabilities and exemptions. There are ways of saving money on tax if you know the rules. We can also give you advice with regards a business model that is proven to bring success so call us today on 08000 235 234 or email firstname.lastname@example.org.