Emplyed and Self-Emplyed - Please advice

endin

Hi there,

I am a web designer, and recently have decided to do some freelance work. My bosses are OK with it, so I'm going to register my own business once will issue firs invoice.

My questions are:

• what tax will I pay?
• what insurance will I pay
• How this is going to affect my NI at my perm job
• where do I need to start with my company registration.

Many thanks for your help in advance.

KiKi

endin wrote: »

• what tax will I pay?
• what insurance will I pay
• How this is going to affect my NI at my perm job
• where do I need to start with my company registration.

Many thanks for your help in advance.

Assuming you work as a sole-trader and not a limited company:

You will pay tax as you do currently, as per the tax rules. Assuming that you are on the 6475 tax code, the first 6475 you earn is tax-free, the next 37400 is 20% and then 40% until 150k when it's 50%. This is applied to your TOTAL earnings for the year from both employed and self-employed work.

So assuming you earn more than 6475 at your workplace, then any earnings from self-employment will be taxed at 20%, or 40%, or 50%, depending on how much you earn from paid employment. However, the tax-free allowance of 6475 can be increased by the amount you spend on allowable expenses for your self-employed work. (Eg, if you spend £1000 on materials which you use *exclusively* for your self-employed work, then your tax-free allowance increases to 7475.)

No-one can tell you how much insurance you have to pay. You'll have to get estimates from companies for liability, indemnity etc, which depend on your profession. Costs me around £280 a year, but that's for my profession and my working circumstances. A good website to use is http://www.simplybusiness.co.uk/insurance/ to get an idea of prices. Don't give them your real phone number, though, or they will call you!

It won't affect NI. However, your self-employed NI will be affected. Usually you pay Class 2 and Class 4 NICs for self-employment, but you get credit for the NI you already pay at your workplace. Again, this will depend on your earnings and circumstances, and you will have to submit a claim to HMRC to not pay the additional NI that you don't need to.

IF you want to operate as a limited company, then you just go to Companies' House website to register. You also need to inform HMRC you are operating as a self-employed person, register online. However, unless you have a good reason to be a limited company (for eg, if you are in the 40% tax bracket), I would not recommend it for someone who is just doing a bit of additional freelance work on top of employed work. You will have to pay 20% (give or take 1%) corporation tax, you have to submit formal accounts (and pay an accountant to do it) each year, and then set up to formally pay yourself a salary, organise NI and tax with HMRC separately etc.

If you operate as a sole-trader, you need to let HMRC know, and then fill in a tax return at the end of the year and you're billed for it. You pay no corporation tax. All the money you earn is yours, and you do not have to operate separate business accounts.

If you are in the 40% tax bracket, it will probably be worth setting up as a limited company, though. In which case, you need to remember to not pay yourself a salary, but to take dividends (tax-free) so that you don't end up paying 40% income tax AND 20% corporation tax!

The Business Link website is great, and this bit on legal structures will help you decide how to set up: http://www.businesslink.gov.uk/bdotg/action/layer?r.s=tl&r.l1=1073858805&r.lc=en&topicId=1085161962

HTH
KiKi

endin

Kiki,

Than you so much for your help. This is exaclie what I needed to know.

Just one more question.

Do I need to report to HMRC straight after firs invoice or by the end of financial year? Or can I jus trade utill end of year?

KiKi

endin wrote: »

Kiki,

Than you so much for your help. This is exaclie what I needed to know.

Just one more question.

Do I need to report to HMRC straight after firs invoice or by the end of financial year? Or can I jus trade utill end of year?

You need to tell HMRC as soon as you start working as a self-employed person (I think strictly it's within 3 weeks, but as long as you register and back-date ASAP you should be okay). You will be heavily penalised if you don't notify them. You have to pay Class 2 NICs weekly and they bill you quarterly (you can set up a DD if you want).

So if you've started, or are about to, go online and let them know this week! You will then get a letter outlining your responsibilities, so as a sole-trader this would be paying NICs, and completing your self-assessment at the end of the year. Once you're registered with HMRC as SE, then you need to register to use their self-assessment system.

Keep paper copies of all incomings (your documentation is your invoice; your proof of payment is your bank statement), and outgoings (documentation = receipts or bills; proof is bank statements or cash book where you note down what cash you've spent). You will need all this for your self-assessment and legally have to keep it for 6 years. Don't forget that you can apportion some of your bills at home for your self-employed work as expenses, proportionate to their use - details on the Business Link website.

KiKi

MrsTinks

Kiki - thanks for all that info - can you help point me towards the bit about what proportionate things can be claimed against tax when working from home? I've done a couple of searches but I can't find it... I'm probably being very blonde!

KiKi

MrsTine wrote: »

Kiki - thanks for all that info - can you help point me towards the bit about what proportionate things can be claimed against tax when working from home? I've done a couple of searches but I can't find it... I'm probably being very blonde!

Page 8 and 9 here are the allowable and disallowable expenses, officially from HMRC: http://www.hmrc.gov.uk/worksheets/sa103f-notes.pdf

Page 8, point 22 specifically. So I use one room (of four) in my house as an office. I use it for 40 hours out of 168 a week, so roughly a quarter, because the room doubles as a living room at the weekend and in the evenings. So all bills are first divided by 4, to account for the one room of use. Then I have to divide it by 4 again to account for the time it's in use as an office.

However, if your room is a full time office, then you don't need to account for the hours of use, only for how many rooms in the house your bills should be divided by.

I'm very strict about it because if HMRC ever investigate I want to be wholly above board! However, I do know people who just allocate one 'room' and charge £300 of expenses a month regardless, because that's how much they'd have to pay for a rented space in town! Even though it costs them nothing like that to actually use at home!

ETA - just realised the guide doesn't tell you the actual expenses. But it's rent (mortgage), heat and lighting bills, power, council tax, house insurance. I'm pretty sure you can't claim water if it's not at a business address; I didn't last year and I would have had a reason for it! On top of that, of course, line rental for phone, mobile, internet etc. But you must only allocate the proportion that's for business use. A rough percentage is fine...you don't need to look at every call made, esp if you're only talking very small amounts.

KiKi