It’s a nerve wracking, but exciting decision, when you take the leap forward into being your own boss and starting your own business. There is so much to think about, and it’s easy to think you need to become an expert in everything: social media, website building, marketing, accounting and so much more!
But in reality there’s so much help out there. There are great videos and free knowledge readily available on pretty much everything, and bit by bit, you figure it all out. Suddenly those magical clients are coming through the door!
Getting those first few clients is great. It really boosts your confidence. Suddenly there’s money coming in instead of going out, and all those hours working on your business become worth it.
If you’re in those early days it’s worth taking some time to make sure you know the basics of your tax requirements, including:
- Registering for Self-Employment
- If you choose this structure, make sure you register as soon as you have started your business. HMRC are happy to use the date of your first sale as a starting point for this.
- The date is important so your Class 2 National Insurance contributions can be calculated correctly.
- Your accountant can register you, or you can call HMRC on 0300 200 3200. You can also complete your registration online.
- Going down the limited company route?
- Speak to/engage an accountant to guide you through the set up process – it’s complicated!
Ensure you are keeping records of all your business expenses and sales. If you do not issue invoices, and make cash sales, you must use a receipt book, even if the customer doesn’t want the receipt! You need to have proof of sale outside of verbal confirmation.
It’s really important to remember when you bank your sales to (this include cheques) to mark it down in your records as sales. If you put your own money in, that’s fine, but keep the records to indicate that total and date of banking.
One of my most common questions is, “Do I need a business banking account?”
From a legal point of view, HMRC do not require you to have a separate business banking account. From a practical point of view, however, they are incredibly helpful, and will save you so much time when it comes to completing your tax return. Certain banks now offer specific sole trader accounts. It’s worth shopping around, as once the fee-free periods are over, you’ll need to budget for bank fees.
What is deductible?
The general rule is that business expenses are items/expenses that are are wholly, exclusively, and necessarily incurred for business purposes.
There are, however, some expenses categories where further investigation is required:
- Entertainment – in most cases, you paying for a client’s coffee (for example), is not deductible. This also includes you buying your own coffee when you go to a networking meeting.
- Petrol expenses – if you are using the capital allowances method, you may be able to claim petrol, but for most people the business mileage allowance is the preferred method.
- Your wage – any money you pay yourself is not a deductible expense!
- Charity payments – money collected from clients and donated to charity is not an expense.
- Fines – i.e. a parking or speeding fine while out visiting a client is not deductible!
Ensuring your tax return is correct is where a good accountant, who understands your business, is worth their weight in gold!
Class 2 National Insurance
This is now collected via HMRC’s self-assessment system. This £145.60 annual payment helps protects your entitlement to State Benefits and importantly counts for your ‘stamp’ towards your state pension eligibility. You can choose not to pay this if your self-employment profits for the year are less then £5,975. This may be worth looking at if you are already employed whilst running your self-employment business, but always seek professional advice.
The above blog only touches the surface of your tax requirements when you are self-employed. Having an accountant on board from the beginning, who communicates any relevant changes to you and can answer your questions will help make any tax requirements far less stressful!
Need More Help With Your Accounting?
Check out my book, The Busy Mums Guide to Small Business Financial Records!