The Tax Advantages of Self-Employment
There are a number of advantages of being self-employed, but you must also comply with various regulations including the tax law.
When you decide to work for yourself you need to choose which form your business will take. The most common forms of business are:
- Sole-trader – you run the business on your own, usually under your own name;
- Partnership – you and one or more other people jointly run the business;
- Limited liability partnership – a special type of partnership that gives you and the other business owners more protection from creditors;
- Limited company – an organisation that you own and control, which carries out the business on your behalf.
If you run your business as a sole-trader or as a partnership you are legally self-employed.
When you choose to run your business as a limited company you will normally be a director and an employee of that company. You will be employed rather than self-employed, but in practice you will work for your own business.
It is important to understand the difference between being employed by your own company, and being self-employed, as it will affect the tax you pay, and the regulations you have to comply with. This article deals only with the advantages and regulations of being self-employed.
As a self-employed person you only have to pay income tax twice a year on 31 January and 31 July. This means you can hang on to your money for longer than an employee who has tax deducted under PAYE from every pay packet.
You must make sure you have the money ready to pay the tax when it is due as you will be charged interest on any tax paid late.
If you work in the co industry you may have tax deducted from each of your sales invoices by the contractor you work for, under the Construction Industry Scheme (CIS). You may be able to reclaim some of the CIS deductions each year when you submit your tax return.
Expenses to Claim
- The cost of any goods or services you use fully for your business can be deducted from your sales revenue for tax purposes. Where an item is used partially for your business and partly for private purposes, such as private car or home, you can claim the business proportion of the costs against your business profits. However, you must be able to justify the business proportion with evidence such as the miles driven, or space used by the business.
- Capital allowances – if you purchase an item that is expected to last several years, such as a van, you can claim a special deduction known as a capital allowance. From January 2016, the first £200,000 you spend on equipment each year qualifies for 100% capital allowances in the year of purchase. This does not include cars.
- Loan interest – if you take out a business loan the interest paid on that loan can be deducted from your sales revenue. The loan must be taken out to fund your business, rather than a personal loan or credit card borrowings.
- Government funding – if you live in an area in the UK that has been designated as a regeneration area you may qualify for a government programme to help people start their own businesses.
- Charitable support is also available from the Prince’s Trust throughout Britain for those aged 18 to 30 who wish to start their own business.
- Self-employed credit – if you have been registered as unemployed for at least six months you may qualify for a self-employed credit of £50 per week if you start your own business. Ask at your local Jobcentre Plus office for more details.
- Working and child tax credits – You may qualify for these while you run your own self-employed business. Your tax credit award is based on your family’s joint income including your self-employed profits, but it will also be determined by the number of hours worked by the adults in the family, and the number of children aged under 16.