Self-Employment and Income Tax
Inevitably the trickiest aspect of self-employment is tax and the necessary learning curve is steep irrespective of whether or not you employ the services of an accountant. Because at the end of the year, you are the one responsible for ensuring your financial affairs are in order.
In short, fail to do your homework and the HM Revenue & Customs people may make you pay - quite literally. At first, the amount of information and definitions of what is and isn't self-employment may leave you reaching for a stiff drink, or those halcyon days when working for a company meant PAYE and no reams of receipts to add up. But it is an aspect of the business that, sadly you are going to have to come to terms with.
Current guidelines in the UK state that a person is defined as self-employed if they meet a number of criteria, for example, do they, themselves, provide the main items of equipment used for the business, and do they decide on the schedule of their own working day?
Supplementary pagesIt is important that you contact your tax office or visit the government department's website at www.hmrc.gov.uk, in order to clarify your status. Why? Well, for a start as well as completing the standard tax return form, there are also supplementary pages that are required of the self-employed. In short, you have to acquaint yourself with the regulations and how the system works.Everyone that fills in a self-assessment tax return receives what is termed a “statement of account” that lists how much you owe the revenue as well as payments made. In the second year of the business, the revenue requires “payments on account” to be made. The amounts reflect projected earnings based on the previous year's return and are, in effect, down payments on the final year-end bill. With this in mind, when budgeting for this second year, ensure that there will be sufficient funds available to meet these payments, which are usually required in January and July.
In addition to income tax, don't forget that changing to self-employed status will affect the type and amount of national insurance that you contribute. In short, anyone who is self-employed is required to pay Class 2 contributions, while many will also be liable for Class 4.
Sound complicated? Well the above information is aimed at those who represent the sole employee of their business. If, or hopefully when, it becomes necessary to take on staff to deal with the influx of work, then further tax implications will have to be taken into account.
Tax creditsOn a brighter note, self-employed people on low incomes or who are either disabled or involved in child-care may be eligible for tax credits. Again, information on whether you qualify for these credits and how to claim can be found on the Revenue & Customs website.
There is no substitute for a good accountant, who can be invaluable in steering you through the regulations and offering advice on finance management. Of course, you'll want them around on those occasions when the Revenue believes that some questions need to be asked regarding your tax return.
All this may sound daunting, but you decided on self-employment to take control of your own destiny. And getting to grips with the current system of taxation is all part of the process. So whether you like it or not, you're going to have to get a head for figures.