If your business makes a loss in one year (i.e your expenses are greater than your sales) there won’t be any income tax to pay. You may also be able to set the loss against your profits in another year, which could reduce the income tax payable in that year.
Do I have to think about VAT if I’m self-employed?
Not necessarily. If your annual turnover (your gross income before deducting expenses) is less than £90,000 you don’t have to register for VAT. If it’s over that you must register and charge VAT on all your sales, which you then owe to HMRC. Once you’re charging VAT you can also claim back any VAT you pay on business expenses like supplies which will reduce your income tax liability.
How is my income calculated for income protection insurance?
An employee’s income is easily determined from their payslips and P60s. If you’re self-employed, an insurer will calculate it by averaging out your income over the past two or three years.
Can I claim benefits if I’m self-employed?
Almost all state benefits, such as Tax Credits and Housing Benefit, are gradually being amalgamated into Universal Credit. If your income from self-employment together with savings and investments is below ÂŁ16,000Â you may be eligible.
David SmithSenior Content Writer
Becoming self-employed
Some people choose to take the leap into self-employment, while others are pushed by circumstances beyond their control. Either way, some 4.24 million people currently work for themselves in the UK. But how do you look after the money you make and what can you do if a physical or mental illness or injury forces you to stop working? To answer the first question, let’s look at some of the best ways to set up and run your self-employed business. For the second we’ll explore self-employed income protection.
Do you have to register as self-employed?
First things first. When you set up a company you have to register it at Companies House. A partnership is much easier: the only formal requirement is to register it with HMRC for tax self-assessment, but ideally, you should also have a partnership agreement.
There is no register of the self-employed. You don’t have to notify anyone of your status. As with partnerships, you need to tell HMRC but beyond that there are no formalities.
Setting up as self-employed
Even if you work alone, you could set up a company with yourself as the sole employee. There may be a few tax advantages to this but they are often outweighed by the expense and administrative burden of doing so.
Most self-employed people have Sole Trader status. You take on the risks, the costs, the profits and the losses. You’re taxed as an individual not as a business. It sounds simple, but there are certain steps you should think about taking to ensure you run your business effectively and manage your money efficiently.
Bank accounts
Setting up a business account allows you to keep your business finances separate from your personal ones. It can also make it easier to fill in your self-assessment tax return and show evidence of your business transactions.
Business banking is not free, so you’ll pay a monthly maintenance charge of £5-£10, although many banks will offer the facility free of charge for the first year or two.
Business plan
Business plans are usually used to secure loans and investment but even if you’re not looking for funding it can be useful to create a business plan purely for your own use. It can be a good way of clarifying your thoughts about your prospects, goals and strategies as well as anticipating possible obstacles.
How do I manage my finances?
There are a few self-employment best practices you can adopt to help you keep your finances in order
How to budget when self-employed
Budgeting is relatively straightforward on a regular salary but when you’re self-employed your income is likely to fluctuate, which can make it harder to plan your expenses. Unless you land long-term contracts, your earnings will always be uncertain. Establishing priorities, by putting essentials at the top of the list, will tell you how much you need to make available before you consider discretionary spending. If you have annual costs, such as insurance, which give you the option of annual or monthly payment, you may find it more helpful to pay monthly. This lets you spread the cost instead of taking the hit in one go and leaving yourself short over the next 12 months.
Business transactions and accounting
Keeping records of all your business income and expenditure not only makes it easy to complete your tax return, you’ll also have a running snapshot of exactly how your business is performing. This includes issuing invoices promptly, following them up and prioritising your expenses payments so you maintain healthy relationships with your suppliers.
Insurance
You should consider taking out insurance to cover you in the event of things going wrong in the course of your business. These are the two most common ones:
Professional indemnity insurance
If a client or customer suffers any loss or damage which they decide to lay at your doorstep, professional indemnity insurance will usually cover the cost of settling their claim. It’s common for professionals like lawyers, surveyors, IT specialists and accountants, but it’s suitable for a very wide range of people who provide services.
Public liability insurance
If your work is office based this probably won’t be an issue but if you work anywhere that brings you into contact with the public, liability insurance will cover you for most accidents and damage to people or property that might be the result of your actions. Settling disputes can be very expensive, so insurance can insulate you from that.
Self-employed expenses
As a self-employed person you’ll need to file self-assessment tax returns. Yes, it involves some work that employees generally don’t need to do, but it has some advantages over the PAYE scheme. One of these is the facility to deduct business expenses from your income. You might be surprised how many things are classed as allowable expenses. They include:
Office supplies like stationery and broadband
Office equipment like computers and software
Business premises like rent, maintenance and utilities
Transport and travel costs
Third-party services like accounting
Raw materials and stock
Marketing
Insurance
Essential special clothing
Membership of professional bodies and trade magazine subscriptions
If you work from home, you can even deduct a proportion of your household running costs such as gas and electricity.
Self-employed income isn't guaranteed
But it's easy to protect what you earn
Financial protection
This brings us to the second question we began with. Since you are your own boss, you have none of the benefits that employers give to their employees and state benefits for the self-employed are limited, so what can you do if you get ill or injured and find yourself unable to work? Maybe you’ve built up a pot of savings that you plan to use when you can’t earn, but savings can only be spent once.
Income protection insurance
Insuring your income against illness and injury, including mental health problems, means you could be covered whenever you’re forced to take an extended break from working and you can claim on your policy as many times as you need to.
How it works
Income protection (IP) is an insurance policy that could pay you up to 65% of your pre-tax income in regular monthly payments while you’re off sick. You take out the policy while you’re in work then if you get ill or injured and have to stop working you can make a claim. With Eleos, the entire process takes place on line, with no need to interact with agents or brokers by phone. From your initial customisable quote through the eligibility check and approval to purchase, it can all be done in a few minutes. You can find out more about Eleos IP here.
Why IP is important for the self-employed
With no employer you have no sickness benefits to cover you when you’re unable to work. You won’t even receive the minimal statutory sick pay of £118.75 a week, because that’s paid by employers. The only benefits you can call on are those provided by the state and those are modest to say the least. The main one available to the self-employed is Employment and Support Allowance, which currently pays a maximum of £92.05 per week and only £72.90 if you’re under 25. You may be able to top this up with Universal Credit, but it won’t come close to replacing even an average income.
In contrast, Eleos IP could give you 65% of your pre-tax income or up to £2,000 a month, whichever is the lower. In order to claim you simply have to provide medical evidence of your inability to work and, as long as your incapacity isn’t the result of something specifically excluded, your claim should be approved. The payments you receive are not subject to self-employed tax rules because they are exempt from income tax. More details on Eleos IP are here.
Taking out income protection
It’s easy to apply. You’ll be asked for a few details then given a quote which you can adjust to suit your needs and budget. You’ll then answer some questions about your health and lifestyle to confirm your eligibility. You can then proceed to purchase and your income will be protected for as long as you keep the policy. With Eleos, the whole thing takes place online, including the claims process.
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