Posted September 3, 2019
Top Tips for start-up Freelancers
I’m starting to work as a freelancer, how do I deal with my accounts and tax?
Whilst becoming your own boss can exciting if can be also be very daunting dealing with the administration and regulations that running a business involves.
Regardless of how you choose to structure your business you will need to prepare accounts and tax returns, we have outlined below some tips and hints to get you started.
When should I register with HMRC
You will need to register with HMRC and complete a personal self-assessment tax return. You will need to complete a tax return regardless of whether you are operating through a company or as a sole trader. If you are trading as a sole trader, you will also need to notify HMRC when you commence trading.
Sold Trader or Limited Company
Operating as a sole trader is the simplest way to start a business. You and the business are the same legal entity, this does mean that you are personally liable for any debts the business may incur.
As a sole trader is the simplest structure it is also the cheapest to run as things like bank charges, accounting fees and mobile phone costs are cheaper. If you make a loss in your early years of trade, you can offset this against your other income e.g. employment income or carry the loss back against previous years employment income (the rules for sole trader losses are complicated so you may wish to contact an accountant for advice).
A limited company is a separate legal entity, it is therefore responsible for its own debts and unless you have guaranteed the debts or committed a misfeasance you will not be liable for the company’s debts.
You can issue shares as you wish, perhaps reward key staff by issuing shares or holding them with your partner.
What taxes will I pay?
You pay tax on the profits of your business. The business structure you operate through will dictate the taxes you pay.
Historically trading via a limited company resulted in tax benefits, however in recent years the introduction of the dividend tax rate has reduced this benefit and unless your profits are over circa £30-40,000 the increased administration costs of operating through a company may outweigh the tax saving you could make.
Tax as a sole trader
Class 2 national insurance
Class 2 national insurance is paid on profits in excess £6,365 per year (2019/2020) at a rate of £3 per week. This is paid annually on your self-assessment tax return.
Class 4 national insurance
Additional class 4 national insurance is paid when your profits exceed £8,632 per year at a rate of 9% and 2%.
Income tax in England and Wales is paid at a rate of 20%/40%/45%.
Tax as a limited company
Limited company’s pay corporation tax at a rate of 19% (2019/20) on its profits (after the deduction of expenses including salaries).
Any income taken as employment incomes from the company will be taxed at of 20%/40%/45% and subject to Class 1 national insurance.
National insurance is paid by the employee at rate of 12%/2% on amounts over £8,632 and employers national insurance paid at a rate of 13.8% on employment income earned over £8,632.
To draw a salary from a company you will need to set up a payroll and pay PAYE. For details on how to set up a payroll please check out our blog.
Tax on dividends
Dividends are paid out of distributable profits (profit after corporation tax). Dividends are taxed at 7.5 %/32.5%/38.1%. However, the first £2,000 of dividends received in a tax year are tax free.
Paying your tax
A company must pay its corporation tax within 9 months and 1 day of the year end and the tax return must be filed with HMRC within 12 months of the year end. Additionally, company’s must file accounts with Company’s House within 9 months of the year end.
The director’s self-assessment tax return must be file online by 31st January following the end of the tax year. The tax payment is also due by 31st January, additionally you may have to make a payment on account towards your current year tax bill. Payments on account are due by 31st January and 31st July each year. Check out or blog on whether payments on account will apply to you.
Should I register for VAT?
If your vatable turnover exceeds £85,000 you must register with HMRC for VAT within 30 days.
You can also register for VAT voluntarily, if you are supplying VAT registered business it is often worthwhile registering for VAT as it will allow you to reclaim the VAT on your purchases. There is additional administration involved in registering for VAT and you should consider carefully the impact on your business before you register voluntarily.
The Trading Allowance
If your self-employed income is less than £1,000 you do not need to register for self-assessment as you can apply the £1,000 trading allowance.
If your self-employed income is over £1,000 you will need to register for self-assessment but instead of claiming all the costs of your business, you can claim the £1,000 trading allowance to make your book keeping simpler. Further details can be found here.
Do I need an accountant?
Whilst there is no requirement for you to have an accountant the benefits of having a good accountant will mean that you meet all of your deadlines and keep up to date with changes with the legislation. Additionally, they will often save you tax and be on hand to offer you advice and support as you get your business up and running.
At Whitesides we provide 1-2-1 training on a variety of bookkeeping software including Sage, Xero, Quickbooks and FreeAgent. You will also have your own dedicated client manager who will be available to answer any questions you may have.