Self-employed taxes and expenses in first year?

Jew

I have a few questions about going into self-employment:

1. I heard somewhere that the first year of being self-employed is tax free?


2. What can one expect to have pay as being self-employed after that?

I mean things like tax, national insurance, student loan (post-1998)... what else is there?

The estimated income would be about £15,000 to £25,000 (or hopefully more, but starting small). So how do I calculate?


3. Could I write things like this off as expenses? They would all be truthfully just that:

A) rent (apartment needed in central London),
utilities,
C) internet connection for work,
D) mobile phone bills,
E) transport costs (trains, busses, flights) for clients,
F) outside lunch/coffee/dinner with clients,
G) anything else?

The only reason for all would be for the business, otherwise, for example, I could live with my parents as now.


Thank you in advance!

TrickyWicky

Jew wrote: »

1. I heard somewhere that the first year of being self-employed is tax free?

LOL!!! You wish!

No, what it means is you don't pay it monthly like you would via PAYE through your payroll dept. Instead you need to put away money each month and then do your self assessment at the end of the tax year and then pay them from the money you put aside each month (most folks reckon about 1/3 of your earnings).

Jew wrote: »

2. What can one expect to have pay as being self-employed after that?

I mean things like tax, national insurance, student loan (post-1998)... what else is there?

Income tax, National ins, pension contributions if you're in one..

Jew wrote: »

The estimated income would be about £15,000 to £25,000 (or hopefully more, but starting small). So how do I calculate?

Put 1/3 aside. Also look into your tax code to find out your tax free allowance and deduct that from your earnings / projected earnings. You don't pay tax on that.

Jew wrote: »

3. Could I write things like this off as expenses? They would all be truthfully just that:

A) rent (apartment needed in central London),
utilities,

For a business premisis such as an office yes but for home no - their attitude is you'd have to pay that anyway regardless of how you earn your crust of bread.

Jew wrote: »

C) internet connection for work,
D) mobile phone bills,
E) transport costs (trains, busses, flights) for clients,
F) outside lunch/coffee/dinner with clients,
G) anything else?

Possibly / probably, only one that I can see as being iffy is the internet but if you need it for work then you need it.

Firefox1975

Stationery, a computer

ref phone calls, only business costs, would suggest you run a seperate mobile for private use

If your place of work is also your place of residence and you can segregate an area off then you can claim that amount of apportioned utilities and rent, however, watch out for business rates which would then become applicable

PlutoinCapricorn

Anyone who is considering self employment would do well to start by reading through https://www.businesslink.gov.uk and investing some time in understanding the different aspects and the rules.

HMRC's pages on SE are very useful too, and they do free courses on completing tax returns.

persa

Jew wrote: »

I have a few questions about going into self-employment:

1. I heard somewhere that the first year of being self-employed is tax free?

Rumours usually have a grain of truth in them. I expect what you've heard has been based on the timing of tax payments - you normally pay tax in advance, however never in your first year, as you have no prior figures to base these calculations on.

Jew wrote: »

2. What can one expect to have pay as being self-employed after that?

I mean things like tax, national insurance, student loan (post-1998)... what else is there?

Assuming you're a sole trader, income tax, Class 2 NI, Class 4 NI, possibly various insurances...

Jew wrote: »

The estimated income would be about £15,000 to £25,000 (or hopefully more, but starting small). So how do I calculate?

With the help of a good accountant/tax adviser.

Jew wrote: »

3. Could I write things like this off as expenses? They would all be truthfully just that:

A) rent (apartment needed in central London),
utilities,
C) internet connection for work,
D) mobile phone bills,
E) transport costs (trains, busses, flights) for clients,
F) outside lunch/coffee/dinner with clients,
G) anything else?

The only reason for all would be for the business, otherwise, for example, I could live with my parents as now.

First of all, there's a difference between what you can put through your books and what you can deduct for tax. Just because you have loads of accounting expenses, doesn't mean they are valid expenses as far as HMRC are concerned.

More information would be needed, but it's very unlikely you could justify an apartment in central London as business related. You do after all need somewhere to live. You could however potentially claim business use for part of the flat and get a pro-rata deduction.

Travel costs are generally okay, but as a self employed person, you can't go getting tax deductions for eating out, as you do need to eat to live and that isn't a business critical expense. As far as entertaining clients goes, HMRC also do not believe anyone "needs" to do that (true or not), so that's also not tax deductible.

Jew

Thanks for your replies everyone.

The reason why I'm avoiding HMRC official advice for now is because their job is to try and scare me to claim back as little as possible.

While I want to know the truth on what's doable, and what's not. Are any of you working as sole traders?




How much are Class 2 NI and Class 4 NI? A set amount, or dependent on income?

persa wrote: »

First of all, there's a difference between what you can put through your books and what you can deduct for tax. Just because you have loads of accounting expenses, doesn't mean they are valid expenses as far as HMRC are concerned.

How do you mean? Sounds very sneaky from their part.

More information would be needed, but it's very unlikely you could justify an apartment in central London as business related. You do after all need somewhere to live. You could however potentially claim business use for part of the flat and get a pro-rata deduction.

The apartments I'm looking at are studios or 1 bedroom. So how do I claim for part of the flat if it's very small? (But expensive being London.)

Also, what if I'd move in with a friend? Would then business use only extend to a part of half of the premises (my half)? If you get what I mean.

I would most definitely need one in central London because my parents live outside of London, and the commute would not be good for meeting clients on demand.

But as I said, if I wouldn't be opening a business, I wouldn't be moving to London. Otherwise, I'd go back to their place and continue working what I do now.

Travel costs are generally okay, but as a self employed person, you can't go getting tax deductions for eating out, as you do need to eat to live and that isn't a business critical expense. As far as entertaining clients goes, HMRC also do not believe anyone "needs" to do that (true or not), so that's also not tax deductible.

So I could just put my Oyster card as an expense? And then keep another one for private use?

About eating out - while I do need to eat to live, I am perfectly happy (and prefer) making my own food when I can anyway.

Eating out would be truly for clients wishes. Very strange that they don't let you deduct entertaining — it is most definitely a need.

For example, it is expected when I go to meetings that I pay for the clients coffee or whatever. Therefore, it's a business expense and not just me personally buying them a coffee for the fun of it and the goodness of my heart :P

jobbingmusician

Jew wrote: »

How much are Class 2 NI and Class 4 NI? A set amount, or dependent on income?

If you are not capable of googling this for yourself, you shouldn't even be thinking of self employment.

jobbingmusician

Jew wrote: »

Also, what if I'd move in with a friend? Would then business use only extend to a part of half of the premises (my half)? If you get what I mean.

I would most definitely need one in central London because my parents live outside of London, and the commute would not be good for meeting clients on demand.

But as I said, if I wouldn't be opening a business, I wouldn't be moving to London. Otherwise, I'd go back to their place and continue working what I do now.

You are indeed entitled to claim the cost of renting a meeting place, if it is a legitmate business expense. Are you thinking of meeting clients in your bedroom? What sort of business is this? (If it is indeed *cough* the sort of business which involves a bed, then your bedroom probably WOULD be a legitimate business expense :rotfl:Otherwise, you have already been told that you need somewhere to live and this is NOT legitimate.)

Jew

jobbingmusician wrote: »

You are indeed entitled to claim the cost of renting a meeting place, if it is a legitmate business expense. Are you thinking of meeting clients in your bedroom? What sort of business is this? (If it is indeed *cough* the sort of business which involves a bed, then your bedroom probably WOULD be a legitimate business expense :rotfl:

LOL

No... I need a place in London to be able to meet clients in London. Either to make meetings easier (instead of traveling for 2h), or simply to work in their offices when applicable and be able to travel there easier.

Otherwise, as I said, if I would not be setting up this business idea, I would not be getting an apartment — it is a direct consequence and expense. I would also be working from this "home", therefore, it'd be an office.

Otherwise, you have already been told that you need somewhere to live and this is NOT legitimate.)

Yes it is. And about: "you have already been told" — please mind your tone.



This is a money saving forum, so I don't get why you're being rude and siding with HMRC on this one instead of pointing me in the direction of minimizing what I have to pay in taxes. If you don't know, then that's fine, I don't either and I have made that clear.

If big corporations and millionaires can do that, I should too — but I can't exactly afford the accountants they can, hence why I'm asking on a MSE forum of smart people.

jobbingmusician wrote: »

If you are not capable of googling this for yourself, you shouldn't even be thinking of self employment.

Instead of a witty reply, maybe simply pointing me in the right direction would have been more helpful

First time I'm hearing that one has to pay TWO sets of NI contributions for being self-employed. Hence why I asked to clarify.

Is the following correct?

Class 2 NI:

2.65*52 = £137.8 per year (not small... where does it go anyway?)

Class 4 NI:

9 per cent on annual profits between £7,605 and £42,475

^^^ that's a rip off! And in addition to the 30% tax rate?

So then HMRC won't let me actually expense all of my actual expenses? Seems like they're getting a good deal.

ceh209

^^^ that's a rip off! And in addition to the 30% tax rate?

What 30% tax rate? At the income levels you're talking about, tax is 20%. Employees would pay 12% (class 1), self-employed pay class 2 and 4 instead.

So then HMRC won't let me actually expense all of my actual expenses?

No. They deem what are tax-allowable expenses and what are not. You don't like the rules? - Don't play the game. :beer:

Firefox1975

"Instead of a witty reply, maybe simply pointing me in the right direction would have been more helpful "

www.google.com

I think you misunderstand the role of HMRC, they aren't there to scare you into claiming back as little as possible. Theyare there to claim all tax "due" to her Majesty the Queen.

You cannot have a one bedroomed apartment in london, live in it, and also claim it is a business premesis. End of that discussion. If the building had several "rooms" you could legitimately kit a room out as an office and claim back associated / apportioned rent and utilities for that particular room.

Your argument that without the business you would not need an apartment is meaningless, as you could quite easily travel throughout the country from living anywhere to work(As many people do) and that "may" be a legitimate expense claim. (unless you are travelling to the same place everyday to work in which case it will not!)

I would suggest you "rent" a meeting room in a hotel or a managed office block for your meetings, which would also be a legitimate expense.

NB - Big corporations and millionaires also pay tax.

What are you planning on as a business anyway? (although the comment below about needing a "bed" for yoru business actually made me laugh out loud - respect to the poster! :beer:)