This article is relevant to consultants registered for tax in the UK only. It covers very brief highlights of the things you need to think about. There are plenty of free resources on the web for contractors or consultants, be they self-employed or operating via their own limited company.
You should always take professional advice in matters of taxation and company registration.
Do I want to be self-employed or work via my own limited company?
There are costs and benefits to being self-employed or working through your own registered company? Being self-employed is straightforward. But, setting up and operating a limited company can be a cost-effective way to reduce your tax liability, if you are a higher rate tax-payer. This is because you can take out a small salary of around £8,600/pa to meet the national insurance and after corporation tax (currently 19%) you can pay dividends to your shareholder. The shareholder is you and you might even include a partner/spouse to maximise tax efficiency. Currently, the first £2,000 of dividends are tax free. You then pay just 7.5% up to the basic rate limit of £50,000/pa.
However, if you create a company then you must comply with company law and basic requirements such as submitting an annual confirmation statement and your accounts to Companies House.
Having you own company can limit your liability and can be seen as a professional way to operate your business. Unless you are completely confident, you might want to the services of an accountant or firm to advise you on things like corporation tax and filing.
Be aware that your contract might be checked by your client for the IR35 intermediaries’ legislation”. If your role is deemed to be disguised employment, then the client or end-payer in the case of an agency, will need to deduct income tax and national insurance from any payment made to you. Always ask.
What about VAT?
Whether self-employed or via a limited company, if your VAT taxable turnover is estimated to exceed £85,000 the you must register your business for VAT with the HMRC.
This means that you must add VAT, currently 20% to your invoices that you charge customers. You must collect the VAT and pay it across ach quarter to HMRC
If your business is registered for VAT, then you can reclaim the cost of VAT that your company has paid on its purchases, such as hotel, stationery, IT kit, phone bills etc. This is called “input VAT”. But only if you have valid VAT receipts.
Always, always retain and carefully file receipts and invoices relating to your business. You can claim all business related expenses such as postage, stationery, insurances, mobile phone, website, IT, equipment and PPE (but not usual work attire).
Keep a simple spreadsheet to record receipts and expenditure in date order and update it weekly or at least monthly. You will need to prepare annual accounts either for the tax year 6 April to 5 March if you are self-employed, or 12 months from the incorporation date of your company.
HMRC have “simplified expenses” schemes for vehicle and home costs:
- Keep good records of your business mileage – you can claim 45p per business mile (for the first 10,000m) if you are using you own car.
- If you also “work from home” you can claim against your business anything from £10 to £26 per month, depending upon the hours you work at home.
Remember you will need professional indemnity and possibly public liability insurance. Some clients will request sight of your insurance credentials.
Keep a full and accurate set of accounts. If HMRC call in your books for inspection, you want them to stand up to any test. If you get the numbers wrong (and it not a minor or “honest” mistake, then you could end up with a large tax bill and possible fine. That won’t help your professional reputation and could even have implications for any professional memberships that you have.
Simplified expenses www.gov.uk/simpler-income-tax-simplified-expenses