Money
Making money
Working for yourself
As we grow older, self-employment becomes more tempting, partly to bring in extra money but also because employers - despite laws against age discrimination - are less open to recognising our talents. So working for ourselves, especially working from home, seems much more attractive
Official estimates are that about 3,250,000 of us are self-employed and business surveys suggest that the number is growing.
Some people retire when they are still fairly young and energetic and feel their skills are being wasted in retirement. Others are drawn into self-employment through online auction sites. What begins with selling unwanted presents or duplicates in your collection of knitting patterns can soon become a small business.
If you simply sell things you have owned for a while or books you have read and no longer want, you are not self-employed. Nor is an artist who sells the odd picture. But if you start buying things with the intention of selling them, or you paint pictures or write articles specifically to sell, or you set out to sell your services in any field, then you are self-employed.
It does not matter how little you make – even nothing at all – if you intend to trade and make a profit then you are self-employed.
REGISTER
The first thing to do is to register yourself as self-employed. You have three months to register from the end of the month in which you begin being self-employed. If you miss that deadline there is a £100 fine. And if you delay past October 6 in the tax year after the one in which your self-employment began, you could face further penalties.
You register by calling the Revenue’s Helpline, 08459 154 515. You will need your National Insurance number and you will be asked for the name of your business.
If you do not have one, just give your own name. You can always change it later. Call the same number with any question about being self-employed.
NATIONAL INSURANCE
You may have to pay two sorts of National Insurance contributions. Class 2 contributions are £2.85 a week (£2.95 from April). You can arrange to pay them by direct debit. If you make a profit of less than £4,635 (£4,825 in 2008/09), you can avoid paying them by applying for what is called “small earnings exception”. But if you need the contributions to get a full state pension, class 2 contributions are a much cheaper option than paying class 3 voluntary contributions (£8.10 a week from April) to fill the gap later.
If you make more than £5,225 profit (£5,435 in 2008/09) you will also have to pay class 4 contributions. They are paid with your income tax when you fill in your self-assessment form. They are 8% of your profits between that threshold and £34,840 (£40,040 in 2008/09) and 1% on profits above that level.
Once you reach pension age (60 for a woman, 65 for a man), National Insurance contributions no longer have to be paid. Your last Class 2 contributions are due in the week before your birthday. Class 4 have to be paid during the whole tax year in which your birthday falls but not after.
SELF-ASSESSMENT
You will be responsible for working out your profit and you will be sent a self-assessment form. If your turnover is less than £15,000 you will need only a simple statement of income and expenditure. Above that you have to fill in the whole self-assessment form, which includes extra self-employment pages. It is far easier to do it online if you can. The deadline for filing the paper form, which arrives in April, is now October 31.
But if you do it online you get another three months until January 31. If you miss the deadline there is an automatic £100 penalty (though that is reduced if the tax you owe is less than £100). Register for online self-assessment at hmrc.gov.uk. You will be sent a password by post, which you must confirm online within 28 days or it will expire.
Tax is paid in two instalments – January 31 and July 31. If you have been paying your tax each month through PAYE, finding it in two lumps can come as a shock. So put aside a proportion of your income to cover tax in a separate account that you never touch.
If your income is modest, a quarter of it should be plenty. But if you are likely to pay higher-rate tax, a third or more is safer. It is better to have too much than too little!
PROFITS
Your profit is, of course, the money you are paid minus the expenses incurred in running the business. But working out the expenses can be tricky.
When you are out on business or ordering things from home, get and keep a receipt for every expense, from bus fares to paper for a printer.
If you run a car which is partly used for business, make a note of the business mileage and the private mileage. Work out the proportion of business use and then apply that to every expense of running the car – insurance, breakdown, servicing and petrol. If you have a car loan, charge a proportion of the interest on that.
If you work from home you can charge a share of the cost of electricity and gas. If you work in one room and there are five rooms altogether, you charge a fifth to the business. When you count the rooms leave out any bathroom or toilet. You cannot charge a share of water bills, unless you have a meter, nor of the cost of repairs to the property. You can charge a share of the council tax and any interest you pay on the mortgage – but not the capital repayments.
Beware of using one room exclusively for business. If you do, capital gains tax may be due if you sell your home. It is safer to give the room another use as well – perhaps keep a sofa bed for guests, use it for sewing or laundry, or make sure the computer is used for playing games or personal letters and emails. You can also charge a proportion of phone bills.
Work that out over three months, taking a note of what proportion of the cost is business-related. Once you have worked out the proportion, apply that to the total cost of your phones. Keep it – and car usage – under review as your business grows.
If you buy capital items – a new computer, a telephone system or a filing cabinet – from April 2008 you can simply charge the entire cost as an expense in the year it is incurred, as long as the total spent in a year is less than £50,000 – called an Annual Investment Allowance.
Cars are outside this scheme. Normally you will be able to set just 20% of the capital value of the car against your tax in the year you buy it (remember that the capital cost has to be reduced by the proportion for private use) and 20% of the balance in subsequent years.
VAT
If your turnover – the money you take in – exceeds £64,000 a year you must register for VAT. That means you have to charge VAT on the goods or services you sell.
However, some items are exempt or have a zero rate of VAT. In particular, books are exempt and second-hand goods fall under a special scheme which means very little VAT is due. If your turnover is less than £150,000 excluding VAT, consider the flat-rate VAT scheme – it simplifies and often reduces the payments due.
* More information at workingforyourself.co.uk, which is run by HMRC but is much friendlier than the regular website, hmrc.gov.uk
* Written by Paul Lewis. The views expressed in this column are Paul's and for general information only. Always seek independent financial advice.
* This article first appeared in the March 2008 edition of Saga Magazine.
