Self Employment – Why To Choose It – Top TipsWritten on November 21, 2024 by Kirk Rice LLP
First of all, let’s be clear on what we mean by self employment. We do not mean running your own limited company by yourself; we mean operating in business AS yourself.
If you are going into business yourself, there are many good reasons why you might benefit from incorporating. However, there also a number of reasons why one might wish to stay as self employed. These include the freedom from the administrative burdens of running a limited company (and the legal obligations taken on as a company director), the privacy of not having to publicly file accounts and have publicly available registered addresses.
It should not be underestimated that running a limited company badly can become expensive – in late filing penalties, accountant’s fees and your own time. It would also be fair to say that it is unwise to assume that a limited company is always the most tax efficient way to proceed, even if on a side by side comparison the figures would suggest so.
A good example of a situation where self employment would possibly be advisable, would be where an individual is leaving their job to start their dream business. I know plenty of people who have done so, leaving the long-term security of the 9-5 and becoming their own boss In this situation, it is vital to be aware of Early Trade Losses Relief. If you make a trading loss within any of the first four tax years of self employed trading, you can carry it back and set it against your income from any source in the previous three tax years (excluding capital gains). You can’t pick and choose which years to set the loss against. You must start with the earliest year.
Now, if your self employment is as a consultant, this might not be very helpful, as with so few costs, a consultant’s main risk is of low income rather than losses. However, if the self employment is starting up a café, a shop, or another business with high start up costs and a reputation to grow, it is possible that the first year or so might not be so assured of profits. In this case, it would be quite attractive to know that should a loss be incurred, you can get back some of the tax paid on earlier years’ employment income.
Needless to say, one should always speak to an accountant before starting up in business.
Other top tips:
1 |
Remember tax payments on account, and that on starting in self employment your first payment of tax will include a 50% uplift for your first payment on account. |
2 |
For this reason, and for general budgeting, be disciplined in keeping to one side an amount each month to pay your tax. |
3 |
Have your tax return prepared early, especially if your income is lower than the previous year. If you can reduce the second tax payment on account in July, it will save you from making any unnecessary overpayments of tax. |
4 |
Set up and use a separate bank account for all your business activities. This helps with the bookkeeping and means you won’t have your accountants or HMRC crawling through your personal transactions at any time. |
5 |
Speak to your accountant about the best way to claim for use of your car, whether on a mileage basis, or as a contribution to total running costs. Download our app for a helpful mileage tracking facility. |
6 |
Keep receipts for everything. You will be able to claim a tax deduction for any costs incurred wholly and exclusively for your business (with a few exceptions) if you have the backup. So get into the habit and keep everything! Download our app for a helpful tool for scanning and keeping copies. |
7 |
Use software, such as Xero, and be disciplined about running your finances properly with it. Businesses are going to be obliged to make MTD (Making Tax Digital) reports from next year anyway, probably either via their accountant or directly via bookkeeping software, so it makes sense to start now. Using this properly will keep your accountancy fees down too, as it means less work for us to put your tax return together. |
8 |
Self employment can often make it a little harder to obtain mortgages or loans, simply because you do not have an assured monthly wage. However, if one goes beyond the high street lenders, there are lenders who are adept and comfortable in lending if the business is sound and well administered. Our financial services team is well placed to advise on a whole-market basis, and know the people to speak to, to get the best deals. |
9 |
Finally, don’t let the fact that you’ve given up the wage, let you forget pensions and life/income protection. These remain as important to the self employed as the employed Again, our financial services team can assist you, and will be happy to chat to you about this even if just to explain your options. |
Any reader interested in discussing the tax implications of being a higher earner can get in touch with us on 01344 875 000 or email us at info@kirkrice.co.uk.
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Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future.
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