Going from employed to self employed -HELP!!!

uk47

I'm currently employed and working full time. In April i'm going to freelance, working from home and will therefore be self employed. I literally don't know where to start with regards to paying tax and this is my first port of call - help!

How do i find out what i can claim as expenses?, the best way to keep books?, Do i need an accountant? I have i flat i rent but i too am a tenant so where do i stand with this? and so on. I would ideally like to site down with someone to whom i can explain my situation and get some advice- Do i approach and accountant, financial advisor, citizens advice and if so how can i find a good one in my area (Tooting, South London)

Wookey

Probably best for you if you find a reputable accountant in your area, they will then act as an agent for you. You will still need to keep records of expenses/receiptsand present it to the accountant who will then file your tax return. It is possible to do it all yourself, however i would recommend using an accountant untill such times as you would feel comfortable doing it all yourself.

minnie123

Go to a few accountants in your area pick the one you are the most comfortable with and AGREE a bill in advance for the work needed. Although you will be paying the accountant for doing your accounts & tax return they will most probably save you more money off your tax bill than you doing the work yourself as they will know exactly what you can claim and capital allowances etc etc..

I am an accountant but work for a midlands based firm

dunstonh

Dont forget that by going self employed you will be reducing your state pensions. So, that is another thing you have to compensate for and make additional provision. Most self employed people dont realise that until its too late.

tyllwyd

When I went self-employed, I started off by going to a bookshop/library and getting out a few books on simple bookkeeping. Because my earnings were very small & not complicated, that was enough to get me started on keeping my own records, enough to do my own tax return. It's worth doing a bit of research even if you have an accountant, so then you'll have an idea of what information they will need from you.

Also, when you do go self-employed, you have to ring HMRC (within 3 months of starting) to register as self-employed. One point just in case - if you go self-employed in April, have a good think about whether you are starting on 1 April or 6 April (ie the new tax year), because that will make a big difference to when your first tax bill will be due. Oh, and I don't know if they are still doing it, but HMRC used to run a workshop for newly self-employed people, which I went to and was quite helpful.

Have a look at the business link website as well, you might find some useful stuff there.


Another thing to think about - I don't know what level your earnings will be, but the tax/NI bill shoots up as soon as you go over the personal allowance (around £6K). If you play around with some figures in the listentotaxman calculator, that might give you a feeling for what percentage of your income you need to put aside for the tax bill when it eventually turns up.

DemiDee

dunstonh wrote: »

Dont forget that by going self employed you will be reducing your state pensions. So, that is another thing you have to compensate for and make additional provision. Most self employed people dont realise that until its too late.

I'm self employed and hadn't realised this. Surely this is compensated for by our class 2 national insurance payments? Dee

dunstonh

DemiDee wrote: »

I'm self employed and hadn't realised this. Surely this is compensated for by our class 2 national insurance payments? Dee

Nope.

You qualify for just the basic state pension which is currently £4700 a year. You dont qualify for the second state pension (what used to be known as SERPS and graduated pension many years before that). That can take the state pensions to over £10k a year. However, an employee starting out now in their 20s would only get around £3900 a year on the second state pension. That still equates to a fund value on a personal pension plan of around £100k though (as its indexed and has spouse protection)

A rough guide is that if you are self employed, you should have around £100k more in your retirement planning than an employed person to make up for the loss.

minnie123

I haven't heard of this second state pension - how does it work, I am interested in learning more about it.

dunstonh

minnie123 wrote: »

I haven't heard of this second state pension - how does it work, I am interested in learning more about it.

The state second pension (S2P) is a relatively new name for what used to be called the State earnings related pension scheme (SERPS). SERPS is more well known and often people still call it SERPS even though its now S2P.

When you get your state pension forecasts it shows what you get paid and how its made up. It will show the basic state pension, SERPS & S2P combined and any Graduated pension (if you are old enough).

When you get to state pension age your state pension will be made up of those three things and paid as a single weekly amount. So, most people in retirement couldnt tell you how their state pension is made up other than the fact they get a state pension and how much it is each week. If you qualified for the maximum it could be a possible £12,000 a year. If you are self employed your whole working life the maximum will be £4700 a year.

The qualification for SERPS/S2P also changes peridically. That is one of the justifications people have for contracting out of S2P (SERPS). A bird in the hand is worth two in the bush that the Govt keep pruning. It changes again next tax year and again in 2010/11. Although the changes should benefit the lower paid. Some occupational pensions are contracted out as well (the SERPS/S2P is factored into their occupational pension so they only get basic as well, although they pay lower NI and the scheme usually compensates)

Anyway, the relevence to self employed/employed is that you have to be paying employee NI contributions, Class 1 to qualify. Class 2 gives you no qualification.

Self employed also qualify for less benefits as well should you be unfortunate to find yourself in that position. Hence the need to look at your insurances more as well.

DemiDee

This is all very interesting. Thank you for taking the time to post such valuable advice.

However, I can't help wondering what exactly class 2 insurance contributions are for, if this is the case? Also, don't forget that the self employed also pay 8% of their income on another class of insurance (but forgotten what exactly!).

Dee

dunstonh

Also, don't forget that the self employed also pay 8% of their income on another class of insurance (but forgotten what exactly!).

Class 4 on profits between £5435 and £40040. Then back to 1% above that.

However, I can't help wondering what exactly class 2 insurance contributions are for, if this is the case?

Its only £2.30pw though. Self employed pay less NI. So, you should expect less.