The idea of working for yourself may be a very nice one indeed, however there are certain financial implications you should be aware of.
Here is our guide to what you should know if you are thinking of becoming self-employed.
Becoming self-employed requires some careful financial planning, particularly in these difficult times. You will need to notify HM Revenue & Customs about your new status, carefully manage your budget and possibly replace any lost employee benefits, including protection benefits. In the following, we look at what you should be aware of:
- You will need to be extremely organised when it comes to keeping financial records. When you become self-employed, tax is declared and deducted on a self-assessment basis each year so the payment you make to the taxman will be taken as one or two lump sum payments. For many self-employed individuals, paying tax is not a top concern when just starting up, however unless measures are implemented during the business year you may not have the cash flow available to pay your tax bill when it is due. Therefore, by keeping accurate records, you should know the amount you will have to pay and you can therefore budget accordingly.
- You must also register to pay Class 2 National Insurance Contributions – these are not paid through your annual tax return, you can usually decide to pay this directly to HMRC on a monthly basis.
- If you have turnover in the region of £77,000 a year, which is chargeable for Value Added Tax (VAT) purposes you need to become VAT registered. However, if you are charged a large amount of VAT, so that you can claim this back against the VAT you may charge, you can register voluntarily even if your turnover is lower than this. However, do be prepared for more paperwork – if you do become VAT registered you will need to submit a quarterly VAT return to HMRC and failure to do this could result in a potential fine.
There are many expenses, which can be claimed back in relation to the self employed working from home. For example, you can claim back a proportion of your telephone fixed line rental on a domestic phone – however, only the proportion of the bill relating to the business use can be claimed back. Other examples include lighting, heating and internet expenditure. If a vehicle is used for both business and private travel then the capital allowances and the total running expenses will be split in proportion to the business and the private mileage. You need to keep records of the number of miles you have travelled on business to calculate the business-use proportion.
You can also claim back expenses for magazines and newspapers – so long as they are purchased exclusively for your business. Other expenses you can claim back include accountancy costs, bookkeeping costs and office or printing supplies. You cannot deduct the cost of entertaining clients however.
Initially, pension contributions may be low on your list of priorities. However, postponing it for too long could prove detrimental to your income prospects when you finally do reach retirement. When you are ready to make further pension contributions please do speak with us as we can review any existing pension benefits and potentially consolidate any different pension arrangements you may already have. We can then help you to implement an investment strategy to your entire pension fund.
When you become self-employed you may be sacrificing employee benefits, such as life assurance, that you may have once had. Rather than directly replacing any benefit with individual policies, it could be a good idea to make an appointment with us so that we can review your actual requirements.
Other key areas of financial protection to consider are critical illness cover and income protection. Income protection will pay out a monthly income if you are unable to work because of sickness, while critical illness cover will pay out a lump sum following diagnosis of one of the specified illnesses defined within your chosen policy. These forms of protection can be expensive so it is essential to seek advice before purchasing.
I can help you to read the small print so that you know exactly what is, and what isn’t, covered.
For further help or advice if you, or someone else that you Know, is thinking of becoming self-employed, please do make an appointment with me today.