Self Employment (UK)
April 10, 2005 1:19 AM Subscribe
I recently(ish) became self employed as an IT contractor. From spending 8 hours a day in an office, I now work wherever and whenever I like. Is this legal?
I work 2 days for a University and the rest of my week is split between leisure, carpentry and other clients. I've been keeping copies of all my invoices and receipts, for tax purposes, as well as stashing 25% of all my income in a separate account to pay the inevitible tax bill.
My question is what steps do I need to go through to make sure I'm paying all the right tax, and working legally? Do I need to register with the government as self employed? Do I need a VAT number? How should I get properly started as being a standalone contractor? I work out of the UK at the moment.
(I've probably been a little slack on this as I actually left my last job 14 months ago, and have been contracting since then... :) )
I work 2 days for a University and the rest of my week is split between leisure, carpentry and other clients. I've been keeping copies of all my invoices and receipts, for tax purposes, as well as stashing 25% of all my income in a separate account to pay the inevitible tax bill.
My question is what steps do I need to go through to make sure I'm paying all the right tax, and working legally? Do I need to register with the government as self employed? Do I need a VAT number? How should I get properly started as being a standalone contractor? I work out of the UK at the moment.
(I've probably been a little slack on this as I actually left my last job 14 months ago, and have been contracting since then... :) )
Sorry, That should be Billing £60,000 - Not earning £60,000.
posted by seanyboy at 1:39 AM on April 10, 2005
posted by seanyboy at 1:39 AM on April 10, 2005
Response by poster: My work for the University is PAYE, on a contract for 2 days a week, so they deduct NI contributions from that, as well as tax. I reckon that I've paid a fair whack of tax already out of that. Hopefully the 25% should be enough
<fingers>crossed</fingers>
posted by gaby at 3:14 AM on April 10, 2005
<fingers>crossed</fingers>
posted by gaby at 3:14 AM on April 10, 2005
25% probably isn't enough. It covers basic Tax, but there's also national insurance to take into account.
Unless Gaby is billing significant amounts for the external work (say, at least £25,000 p.a.) I'd say 25% is enough.
If the separate work is particularly light, and the university is paying the bulk of their income, then the tax bill could be extremely light, with income tax being only £202 tax on earnings of £6765 for 2004/05, just 2.9%, and if it took Gaby a while to get the extra work, there may be less tax due in Jan 2006 than expected.
If we say the external work is £25k in a single tax year, that would be £4213.70 of income tax, approximately 16.8% of the income. I'm too lazy to work out the NI, but my 'worst case' scenario shows the total sum coming out as about 27.6% of the total. So, for any sum over £25k, 25% is too low, but below that, it's fine.
Also, consider that anyone with any nous will be making a whole ton of deductions anyway (if you're not, Gaby, do so!) to send their perceived income spiralling downwards. All those receipts for pens, Powerbooks, computer software, petrol (only a certain amount thereof that you use for business), and various other things..? They are all now 'business expenses' and are deductable against your income!
posted by wackybrit at 4:05 AM on April 10, 2005
Unless Gaby is billing significant amounts for the external work (say, at least £25,000 p.a.) I'd say 25% is enough.
If the separate work is particularly light, and the university is paying the bulk of their income, then the tax bill could be extremely light, with income tax being only £202 tax on earnings of £6765 for 2004/05, just 2.9%, and if it took Gaby a while to get the extra work, there may be less tax due in Jan 2006 than expected.
If we say the external work is £25k in a single tax year, that would be £4213.70 of income tax, approximately 16.8% of the income. I'm too lazy to work out the NI, but my 'worst case' scenario shows the total sum coming out as about 27.6% of the total. So, for any sum over £25k, 25% is too low, but below that, it's fine.
Also, consider that anyone with any nous will be making a whole ton of deductions anyway (if you're not, Gaby, do so!) to send their perceived income spiralling downwards. All those receipts for pens, Powerbooks, computer software, petrol (only a certain amount thereof that you use for business), and various other things..? They are all now 'business expenses' and are deductable against your income!
posted by wackybrit at 4:05 AM on April 10, 2005
Of course, my answer misses the fact that the income tax allowances may not be usable due to tax being taken by the university. As I've never dealt with a combined employed/self-employed situation, I can't give much advice here.. although I would speculate that when you receive your annual tax form, you can just 'add it on', but this may knock up your liability from the 25% range up to about 30%-a third.
posted by wackybrit at 4:07 AM on April 10, 2005
posted by wackybrit at 4:07 AM on April 10, 2005
Furthermore..
My work for the University is PAYE, on a contract for 2 days a week, so they deduct NI contributions from that, as well as tax. I reckon that I've paid a fair whack of tax already out of that.
That's not really how it works. Some people keep their third-party work hidden from the tax man, but having a PAYE employer handle your taxes for their employment does not exempt you from dealing with the taxes for your other income. You may have paid 'a fair whack of tax already', but that's only on the university's income.
In fact, this could become quite messy. Let me make the wild assumption that the university pays you £25k p.a. for your two days of work (easily possible if you're a prof or researcher), and then that you make £25k p.a. on 'external' work. The university handles your taxes for them under the PAYE scheme. So, you now have 25k of extra income to handle the tax for. You only have £8420 of your 22% tax bracket remaining, so you pay £1852.40 tax on that portion, and then you have £16580 of your income in the 40% tax bracket.. which brings your extra tax bill up to £8484.40.. on the £25000.. or 33.9%.. this is without taking NICs into account even!
My advice? Seek an accountant. In a situation like this they'll save you more money than they'll charge, unless you are earning significantly smaller amounts than in the examples above.
posted by wackybrit at 4:13 AM on April 10, 2005
My work for the University is PAYE, on a contract for 2 days a week, so they deduct NI contributions from that, as well as tax. I reckon that I've paid a fair whack of tax already out of that.
That's not really how it works. Some people keep their third-party work hidden from the tax man, but having a PAYE employer handle your taxes for their employment does not exempt you from dealing with the taxes for your other income. You may have paid 'a fair whack of tax already', but that's only on the university's income.
In fact, this could become quite messy. Let me make the wild assumption that the university pays you £25k p.a. for your two days of work (easily possible if you're a prof or researcher), and then that you make £25k p.a. on 'external' work. The university handles your taxes for them under the PAYE scheme. So, you now have 25k of extra income to handle the tax for. You only have £8420 of your 22% tax bracket remaining, so you pay £1852.40 tax on that portion, and then you have £16580 of your income in the 40% tax bracket.. which brings your extra tax bill up to £8484.40.. on the £25000.. or 33.9%.. this is without taking NICs into account even!
My advice? Seek an accountant. In a situation like this they'll save you more money than they'll charge, unless you are earning significantly smaller amounts than in the examples above.
posted by wackybrit at 4:13 AM on April 10, 2005
Sorry to keep posting so much, but I keep finding new nuggets in your post..
I work 2 days for a University and the rest of my week is split between leisure, carpentry and other clients.
Is your 'other work' spread across multiple clients/sources of income, or is it for one client at a time? For example, are you on-site for a few weeks here and there with another client, then move onto another client? If so, you could face the wrath of IR35.
posted by wackybrit at 4:15 AM on April 10, 2005
I work 2 days for a University and the rest of my week is split between leisure, carpentry and other clients.
Is your 'other work' spread across multiple clients/sources of income, or is it for one client at a time? For example, are you on-site for a few weeks here and there with another client, then move onto another client? If so, you could face the wrath of IR35.
posted by wackybrit at 4:15 AM on April 10, 2005
I swear this is my last post this hour! Refer to the Inland Revenue's official tax rates and allowances.
posted by wackybrit at 4:18 AM on April 10, 2005
posted by wackybrit at 4:18 AM on April 10, 2005
You should have a look here for information for first time contractors.
From the information you have given you have paid tax/NI on your earnings from the Uni. If you are PAYE then your basically a permie so you will not be able to claim any expenses for that work (unless you have an agreement with your employers).
For your 'other clients' you should set-up a limited company or use an umbrella company. The tax man will catch up with you eventually.
It might be worth spending the money and seeing an accountant to sort out your finances.
As for WackyBrits IR35 warning - it was my understanding that if you do work for more than one client at the same time then that puts you outside IR35.
posted by voon_42 at 4:54 AM on April 10, 2005
From the information you have given you have paid tax/NI on your earnings from the Uni. If you are PAYE then your basically a permie so you will not be able to claim any expenses for that work (unless you have an agreement with your employers).
For your 'other clients' you should set-up a limited company or use an umbrella company. The tax man will catch up with you eventually.
It might be worth spending the money and seeing an accountant to sort out your finances.
As for WackyBrits IR35 warning - it was my understanding that if you do work for more than one client at the same time then that puts you outside IR35.
posted by voon_42 at 4:54 AM on April 10, 2005
Response by poster: Wackybrit: Is your 'other work' spread across multiple clients/sources of income, or is it for one client at a time?
My 'other work' constitutes days and half days at other client's sites and miscellaneous website work outside of the contracted 2 days. The work that I do for the uni is SysAdmin work, so I think that's outside of the service industry.
From looking at the Inland Revenue's official tax rates and allowances, I fall into the middle band of 22%, so will probably need to think about how much I'm going to have to pay in NI contributions.
Methinks it's time to find an accountant. Contracting friends of mine have said they're worth their weight in gold. Business Link will be able to help also. Thanks for the great links!
posted by gaby at 5:55 AM on April 10, 2005
My 'other work' constitutes days and half days at other client's sites and miscellaneous website work outside of the contracted 2 days. The work that I do for the uni is SysAdmin work, so I think that's outside of the service industry.
From looking at the Inland Revenue's official tax rates and allowances, I fall into the middle band of 22%, so will probably need to think about how much I'm going to have to pay in NI contributions.
Methinks it's time to find an accountant. Contracting friends of mine have said they're worth their weight in gold. Business Link will be able to help also. Thanks for the great links!
posted by gaby at 5:55 AM on April 10, 2005
I did this and it's no biggie. I set-up as a sole trader rather than a limited company, which saves on the paperwork.
I wouldn't bother getting VAT registered (unless you're spending a serious amount in VAT), again because this will save on a *lot* of extra paperwork.
Get yourself registered with the Inland Revenue as self-employed so they make sure to send you the right tax return forms and reminders each year.
Putting aside 25% of your income is likely enough to pay your tax, unless you earn enough to push you into higher rate bracket. NI contributions are something like £6/week (or is that £6/month...? I can't remember).
As dodgygeezer said, make sure you're writing off all your valid business expenses against income. Include everything relevant to your line of business: subsistence (food/drink when working away from your base office, e.g. at a client site), transport costs (petrol costs, public transport, basically any cost incurred in getting to and from a client site, etc. although the Inland Revenue does have specific rules about cars), trade publications (magazines, books), stationery, computer hardware/software, training you might need to get/keep your skills up-to-date, ISP charges, broadband, telephone (70% of the cost of the phone bill if you use a single line for home/business), bank charges on your business account, up to 30% of your home utility bills ("use of home as office") if you're working from home during the day but benefitting from the utilities you pay for personally (except if you have a dedicated office space within the house when there could be capital gains implications if your property value increases)...
You can get an accountant to do your tax returns if you want, but with the Inland Revenue's web-based self assessment service, as long as you keep all your records (what you earn, what you expend, interest on bank balances, etc.) it's not madly difficult to do it yourself. With a mix of PAYE and self-assessed tax, you just fill out different web forms using your P60 from your employer to provide the PAYE information and your own records for the self-employed side of things.
I wouldn't even consider doing paper-based returns, though - the calculations are a bitch.
Hope this helps.
posted by Lleyam at 6:49 AM on April 10, 2005
I wouldn't bother getting VAT registered (unless you're spending a serious amount in VAT), again because this will save on a *lot* of extra paperwork.
Get yourself registered with the Inland Revenue as self-employed so they make sure to send you the right tax return forms and reminders each year.
Putting aside 25% of your income is likely enough to pay your tax, unless you earn enough to push you into higher rate bracket. NI contributions are something like £6/week (or is that £6/month...? I can't remember).
As dodgygeezer said, make sure you're writing off all your valid business expenses against income. Include everything relevant to your line of business: subsistence (food/drink when working away from your base office, e.g. at a client site), transport costs (petrol costs, public transport, basically any cost incurred in getting to and from a client site, etc. although the Inland Revenue does have specific rules about cars), trade publications (magazines, books), stationery, computer hardware/software, training you might need to get/keep your skills up-to-date, ISP charges, broadband, telephone (70% of the cost of the phone bill if you use a single line for home/business), bank charges on your business account, up to 30% of your home utility bills ("use of home as office") if you're working from home during the day but benefitting from the utilities you pay for personally (except if you have a dedicated office space within the house when there could be capital gains implications if your property value increases)...
You can get an accountant to do your tax returns if you want, but with the Inland Revenue's web-based self assessment service, as long as you keep all your records (what you earn, what you expend, interest on bank balances, etc.) it's not madly difficult to do it yourself. With a mix of PAYE and self-assessed tax, you just fill out different web forms using your P60 from your employer to provide the PAYE information and your own records for the self-employed side of things.
I wouldn't even consider doing paper-based returns, though - the calculations are a bitch.
Hope this helps.
posted by Lleyam at 6:49 AM on April 10, 2005
Having thought about it a little more:
- I meant wackybrit not dodgygeezer
- It's been a while since I was self-employed, so a consultation with an accountant might be a good idea; at the very least, give the Inland Revenue a call to discuss as the figures/values I quoted have probably changed
- As I understand IR35, even if you work for more than one client at once you can still be subject its provisions and could be considered a de facto employee of each of your clients; therefore, you might want to consider agreeing a price for a set of deliverables rather than a T&M consultancy approach in order to protect yourself
- Obviously the advice about deducting business expenses from your income only applies to your self-employed work, your uni PAYE work is separate
posted by Lleyam at 7:22 AM on April 10, 2005
- I meant wackybrit not dodgygeezer
- It's been a while since I was self-employed, so a consultation with an accountant might be a good idea; at the very least, give the Inland Revenue a call to discuss as the figures/values I quoted have probably changed
- As I understand IR35, even if you work for more than one client at once you can still be subject its provisions and could be considered a de facto employee of each of your clients; therefore, you might want to consider agreeing a price for a set of deliverables rather than a T&M consultancy approach in order to protect yourself
- Obviously the advice about deducting business expenses from your income only applies to your self-employed work, your uni PAYE work is separate
posted by Lleyam at 7:22 AM on April 10, 2005
I meant wackybrit not dodgygeezer
I think you were right the first time!
posted by wackybrit at 11:53 AM on April 10, 2005
I think you were right the first time!
posted by wackybrit at 11:53 AM on April 10, 2005
wackybrit: For some reason, I'm a bit confused today! Doesn't bode well for work tomorrow morning :-)
posted by Lleyam at 12:21 PM on April 10, 2005
posted by Lleyam at 12:21 PM on April 10, 2005
Get yourself registered with the Inland Revenue as self-employed
Also there's a £100 fine if you leave this for more than 1 month after starting work.
posted by Lanark at 1:23 PM on April 10, 2005
Also there's a £100 fine if you leave this for more than 1 month after starting work.
posted by Lanark at 1:23 PM on April 10, 2005
I don't remember a fine being applicable when I registered, which was easily after one month of starting self-employed work. To my surprise, I've found the taxman to be pretty reasonable if you explain your situation, so if they mention a fine I suggest you just tell them that you've only recently discovered you need to register; I'll bet they'll waive it if they understand you're not trying to con them.
posted by Lleyam at 1:27 PM on April 10, 2005
posted by Lleyam at 1:27 PM on April 10, 2005
Both the Revenue and Customs and Excise (VAT) will be reasonable if you're honest with them. They're not interested in slapping people down for the sake of it and the Us vs. Them attitude of earlier years has softened considerably. If you go to them and say "I want to give you money", it's unlikely that they're going to fine you for not volunteering that information earlier. The fact that you're willing to pay tax owed from the previous year and have all paperwork will stand in your stead.
Saying that, there's always the chance that you'll get some idiot dealing with your case who's had a bad day and is going to hold you to the letter of the law.
posted by seanyboy at 1:45 AM on April 11, 2005
Saying that, there's always the chance that you'll get some idiot dealing with your case who's had a bad day and is going to hold you to the letter of the law.
posted by seanyboy at 1:45 AM on April 11, 2005
This thread is closed to new comments.
25% probably isn't enough. It covers basic Tax, but there's also national insurance to take into account.
Income tax and National Insurance
As a sole trader you have to:
* register with the Inland Revenue as self-employed
* complete a self assessment tax return every year
* Pay Class 2 and Class 4 National Insurance Contributions (NICs)
More info on On Income Tax Self Assessment.
A good place to start for information is Business Link
posted by seanyboy at 1:38 AM on April 10, 2005