Self-employed taxes and expenses in first year?

InsideInsurance

Jew wrote: »

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

To clarify on this one as it really depends on what you mean.

If you started being self employed in April 2012 you would not actually pay any income tax or class 4 NI or student loan (though thats not a tax) until you've submitted your first tax return which would have to be done by January 2014

So, you do pay tax on your first years takings but you dont physically pay it until the following year. Therefore in a certain sense you are free of tax payments but you are simply accruing them. Of cause that means when you stop being self employed you will still have one final tax bill to pay the following year!

It is therefore always sensible to keep a running total and put the money aside each month for your liabilities rather than spending everything and then having problems finding the money when it becomes due (especially in the year after you stop)


The one thing I would say is that you need to look at your business plan! You say you will be earning £15,000 but that you will be renting a central London apartment as well as wining and dining clients - which if they are City based or such isn't going to be at McDonalds!

Even a basic one bed flat in a not great area of central London is going to be over £10,000 per year, for an ok location your talking over £15,000 and then you have utilities, travel, food, clothing, living on top of that

Notmyrealname

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?

Kind of. You pay tax but it is deffered due to when the financial year ends and when tax is due for that year however in the first year of trading you not only pay that years tax but tax "on account" for the following year so you actually pay TWICE as much. Works as follows:

6/4/2012-5/42013 - Earn £12k profit. Tax due £780.

Because it is your first trading year you'll pay by:

31/1/2014 - £780 + 50% on account = £1170

31/7/2014 - Another 50% on account = £390.

When it comes to your second years trading 6/4/2013 - 5/4/2014, the tax bill is generated, what you've paid on account is deducted and the total or refund paid by 31/1/2015. From thereon in there's no payment on account, just the bill for that year.

The aim of the game in Year 1 trading is not to make a taxable income on paper or keep it as small as possible to reduce the amount paid on account. This doesn't mean cooking books or doing anything illegal - just making sure you put absolutely everything through the books down to every bit of paper, envelope and stamp you use for business purposes and even claiming mileage at HMRC rates for walking.

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, Class 2 NIC at £2.50/w which is billed every 6 months and Class 4 NIC on profits if you've earned enough.

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

A) rent (apartment needed in central London),

Only the portion which is used for the business assuming the whole room(s) is/are used (£200 a week rent for 4 rooms, you use one solely for business, you can claim 25% or £50). If the room is shared purposes, i.e you use the living room during the day for business and personal use on the evening you can only claim an annual flat rate of OTTMH £150.

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?

work as above but if shared use you claim the percentage which is business

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

You will only be able to claim the amount which is business use for the accommodation in London.

Jew

ceh209 wrote: »

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.

Thanks for your reply.

Ah that's what I meant, 30% in total. Pretty high considering a lot of actual expenses can't be expensed.

I think in Germany and other places in Europe it's like 10% for self-employed sole traders.

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

If you don't mind me asking, are you self-employed?

This is a money saving forum, I was expecting to be pointed in the direction of minimizing what I have to pay in taxes.

Corporations and millionaires do everything they can to reduce taxes through loopholes. I am sure there are tons here too. Optimizing ones business is an important aspect.

Firefox1975 wrote: »

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

www.google.com

Did you read on?

"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."

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.

They are there to get as much tax as possible. And I beg to differ, UK government authorities are very often trying to scare people. Look at all the "benefit fraud" ads. It scares regular people, but corporations get away with large-scale fraud and tax avoidance. Are they scared? No. I've been getting TV License threats for years now — and I don't even own a TV.

A businesses job is to claim as many expenses as legally viable to reduce tax.

Discouraging that for small businesses is not a good idea.

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.

Let me elaborate:

It would be a business premises during business hours, e.g. 9-5.

The bathroom, kitchen and desk would become used for the business.

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!)

If you are calling my argument meaningless from your opinion:

Again, I am trying to optimize my business here. It is more efficient to not have to travel 2h in each direction, but be on-site. I have already explained that.

Is that necessarily HRMC's opinion? Again, I am looking for loopholes. I appreciate that few here are accountants, but maybe someone knows something

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.

Would require traveling 2h there and 2h back. Not viable. I cannot sleep in the office. Hotel would be more expensive than rent. I've already looked into that. But I bet a hotel would be easier to expense!

In either case, I am sure there is a loophole here. Just a matter of finding it.

NB - Big corporations and millionaires also pay tax.

When did I say they don't? They get big tax breaks and have accountants making sure they pay as little tax as possible.

I am trying to do the same, minus the expensive accountants.

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:)

Back-end web development work.

Jew

Thanks for your reply Inside!

InsideInsurance wrote: »

To clarify on this one as it really depends on what you mean.

If you started being self employed in April 2012 you would not actually pay any income tax or class 4 NI or student loan (though thats not a tax) until you've submitted your first tax return which would have to be done by January 2014

So, you do pay tax on your first years takings but you dont physically pay it until the following year. Therefore in a certain sense you are free of tax payments but you are simply accruing them. Of cause that means when you stop being self employed you will still have one final tax bill to pay the following year!

It is therefore always sensible to keep a running total and put the money aside each month for your liabilities rather than spending everything and then having problems finding the money when it becomes due (especially in the year after you stop)

Ah thanks

Gotcha.

And how does it work in following years? Tax monthly? Or tax on as the earnings come in?

What about NI?

The one thing I would say is that you need to look at your business plan! You say you will be earning £15,000 but that you will be renting a central London apartment as well as wining and dining clients - which if they are City based or such isn't going to be at McDonalds!

Even a basic one bed flat in a not great area of central London is going to be over £10,000 per year, for an ok location your talking over £15,000 and then you have utilities, travel, food, clothing, living on top of that

ROFL McDonalds :P

Ah, yeah, I just put a low estimate just in case. I would feed in my savings (or perhaps quit the business) if it was £15k a year. Or if it's beyond that, and I really want to continue, maybe also my parents financial help.

lovinituk

Jew wrote: »

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.

LOL! Another myth you have been told! I went on a HMRC free course for the self employed and when I have had to phone them for advice they have been very helpful. Their job is to help you get it right.

You might also want to consider engaging an accountant as they can usually save you more in tax than they charge you in fees.

jobbingmusician

OK, I accept that some of my previous post was tongue in cheek - although my comment 'you have already been told that you need somewhere to live and this is NOT legitimate' hardly needs the response 'mind your tone' - it is simply a neutral and factual comment.

Here is a bit of USEFUL advice. If you need to meet clients in smart surroundings in central London, the cheapest way to do this is to walk into a very smart hotel and order coffee for you and your clients. The coffee will be expensive (and tax-deductible) but for the cost of the coffee you will get an elegant meeting space. The space is not guaranteed to be quiet, but you can do your own research to find which hotels have good meeting spaces at which times. I reiterate - you cannot claim the cost of a 1-bedroom flat in which you are living as a business expense. (As other posters have told you, you may be able to claim a room in a residence if it is used as an office.)

Jew

Notmyrealname wrote: »

Kind of. You pay tax but it is deffered due to when the financial year ends and when tax is due for that year however in the first year of trading you not only pay that years tax but tax "on account" for the following year so you actually pay TWICE as much. Works as follows:

6/4/2012-5/42013 - Earn £12k profit. Tax due £780.

Because it is your first trading year you'll pay by:

31/1/2014 - £780 + 50% on account = £1170

31/7/2014 - Another 50% on account = £390.

Thanks Notmyrealname!

What's the 50% on account? I don't get it? So in the first year I'll be paying 100% more than what I actually owe?

That doesn't sound very business friendly...

When it comes to your second years trading 6/4/2013 - 5/4/2014, the tax bill is generated, what you've paid on account is deducted and the total or refund paid by 31/1/2015. From thereon in there's no payment on account, just the bill for that year.

Cool thanks, but does that mean they'll keep the 100% from the previous year for the whole second year? And only give back any excess they took at the end?

(Pretty nice deal for them, as they can invest and make interest of it.)

The aim of the game in Year 1 trading is not to make a taxable income on paper or keep it as small as possible to reduce the amount paid on account. This doesn't mean cooking books or doing anything illegal - just making sure you put absolutely everything through the books down to every bit of paper, envelope and stamp you use for business purposes and even claiming mileage at HMRC rates for walking.

No way, I can claim for walking?! That's so cool! :P

What about London Transport?

Income Tax, Class 2 NIC at £2.50/w which is billed every 6 months and Class 4 NIC on profits if you've earned enough.

Thank you

Only the portion which is used for the business assuming the whole room(s) is/are used (£200 a week rent for 4 rooms, you use one solely for business, you can claim 25% or £50). If the room is shared purposes, i.e you use the living room during the day for business and personal use on the evening you can only claim an annual flat rate of OTTMH £150.

What's OTTMH?

£150 a year? That's pretty darn low.

I would be using the apartment for business about 50-60% of the time, and for personal the rest (most of it sleeping).

Same with utilities, kitchen, bathroom, etc.

So.. where does that leave me?

Thanks in adavnce!

Jew

lovinituk wrote: »

LOL! Another myth you have been told! I went on a HMRC free course for the self employed and when I have had to phone them for advice they have been very helpful. Their job is to help you get it right.

You might also want to consider engaging an accountant as they can usually save you more in tax than they charge you in fees.

Nothing I was told, that's the feeling I get — and I backed it up with a few other things of how govt agencies work (please see my post).

Plus, it's not like HMRC will suggest any loopholes. I'm sure they're helpful to get it right — not saying the government is out there to lie to you — but they also won't go the extra mile.

So I guess that's where the suggestion for an accountant comes in. And that's a viable one. But was just wondering what advice I can get on this forum in that respect.

Maybe someone has some self-emloyment experience in this regard.

By far the biggest expense in London is living, and getting that or part of it tax deductible would be great.

Jew

jobbingmusician wrote: »

OK, I accept that some of my previous post was tongue in cheek - although my comment 'you have already been told that you need somewhere to live and this is NOT legitimate' hardly needs the response 'mind your tone' - it is simply a neutral and factual comment.

I didn't like the "you have already been told" part.

And you misquoted me a bit, I said, "please mind your tone". It wasn't a command but a polite request to keep this discussion civil.

Here is a bit of USEFUL advice. If you need to meet clients in smart surroundings in central London, the cheapest way to do this is to walk into a very smart hotel and order coffee for you and your clients. The coffee will be expensive (and tax-deductible) but for the cost of the coffee you will get an elegant meeting space. The space is not guaranteed to be quiet, but you can do your own research to find which hotels have good meeting spaces at which times.

Thank you.

I have considered some of what you suggested. And now that you added more info, just wanted to say that:

I wouldn't be meeting clients much in my apartment TBH. It's more for working — which would be something like 9 to 5, or probably later, even 8, and for not wasting time traveling to London.

So that's about 50% of the day, hence, I don't see why I couldn't claim 50% of the rent as an expense.

I reiterate - you cannot claim the cost of a 1-bedroom flat in which you are living as a business expense. (As other posters have told you, you may be able to claim a room in a residence if it is used as an office.)

But the apartment would be an office for 50% of the day...

lovinituk

Jew wrote: »

Nothing I was told, that's the feeling I get — and I backed it up with a few other things of how govt agencies work (please see my post).

Plus, it's not like HMRC will suggest any loopholes. I'm sure they're helpful to get it right — not saying the government is out there to lie to you — but they also won't go the extra mile.

So I guess that's where the suggestion for an accountant comes in. And that's a viable one. But was just wondering what advice I can get on this forum in that respect.

Maybe someone has some self-emloyment experience in this regard.

By far the biggest expense in London is living, and getting that or part of it tax deductible would be great.

I was self employed as a sole trader and now director of my company having just incorporated the business. My advice is to definitely see an accountant - I did. I'm familiar with self assessments having been a higher rate tax payer when I was employed but I still didn't know all the ins and outs. An accountant will know all the up to date rules and allowances.