Whether you are already self employed or looking to become a self employed consultant, this tax advice guide will help you understand how to go self employed, what tax you’ll need to pay and some useful tax advice just for self employed consultants.
How to Go Self Employed as a Consultant
If you would like to become a consultant in your field of expertise, then going self employed is the easiest and quickest way to get started. When you are self employed you are responsible for your own taxes and national insurance (unlike if you were employed in a job and issued with a payslip each month showing your pay and deductions).
The simplest way to register as Self Employed is to visit the HMRC website and register online. The process can take 10 days to complete upon which HMRC will post you a UTR number (Unique Tax Payers Reference). Keep this safe as you will need this code to file your Self Assessment Tax Return.
Once self employed you must then:
- Set up a bookkeeping system that keeps a record of all your income and expenses, as well as filing all your business receipts;
- Complete a Self Assessment Tax Return by 31 January each year summarising your business income and expenses;
- Pay any Tax and National Insurance due by 31 January each year (and payments on account by 31 January and 31 July each year).
Your tax return submitted by 31 January covers the previous tax year (a tax year runs from 6 April to 5 April). So for example, your tax return due by 31 January 2018 details your earnings between 6 April 2016 to 5 April 2017 and this will detail your income from consultancy as well as any other earnings you may have (such as from other rental income, bank interest or dividends).
Here is a sample Tax Return and Sample Self Employment Section which would need to be included for Self Assessment. These are just samples, you will need to submit your own Tax Return online.
It is also worth noting that if you already complete a Self Assessment Tax Return, for example because you collect rental income or have savings interest, that you need to complete a Form CWF1 to go self employed. Again, you can do this online here and you will need your Unique Tax Payers Reference.
What Tax Do You Pay as a Self Employed Consultant
When you are self employed you pay the following types of tax on your earnings:
The amount of tax you pay will depend on the amount you earn in total during a tax year, across all your income. The amount of Class 2 and Class 4 National insurance you pay will depend on the amount of business profit you make as a self employed consultant.
How to Work Out Your Business Profits
Your tax and national insurance is based on your business profits. So you’ll need to add up all the income you have received from your clients and deduct all your costs which are ‘wholly, necessarily and exclusively’ incurred in the performance of your business – these are known as allowable expenses.
Allowable Expenses for Self Employed Consultants
Generally speaking all your business expenses are allowable for tax but it is really important to keep all your business receipts so you can claim for them against your taxes and have an effective way to Organise Your Business Receipts. Some expenses are disallowable due to their contentious nature in HMRC eyes such as client entertainment.
Examples of Allowable Expenses for Self Employed Connsultants
Computer & Printer
As part of setting up your Consultancy business, you may need to invest in certain items such as a laptop, printer. These all are allowable and some may attract Annual Investment Allowance (AIA), which is another way of making tax savings.
Websites is an integral part of doing business and allows you to give potential customers the chance to understand the services you offer, your location, pricing and get a feel for your experience and personality. If you are considering investing in a website then it is worth noting that the website, domain and hosting again are all allowable expenses.
Business cards, if your choose to get them, are a great way to connect with people and give potential clients your details. Again, these will be an allowable business expense.
Phone and Internet
The cost of a business phone (mobile and/or landline) and your internet is an allowable expense however if there is personal use then only a portion of the contract costs can be claimed.
If you choose to travel to your clients homes then you will no doubt incur the cost of travel. Keep hold of your receipts for trains, tubes or taxis as they should all be allowable expenses and help reduce your tax bill.
If you need to use your car to travel to clients and you should note down the mileage as this falls under the category of travel. Record you miles to and from your destination since you can claim 45p for the first 10,000 miles of driving and 25p thereafter.
Use of Home
If you choose to work from your home then there are rules that will allow you to claim either a flat rate each week or an amount for the running costs of doing so from your home as a portion of your household bills such as gas, water, electricity or rent.
Note – If you choose to rent a room or premises you may not be able to claim for the cost of travel/mileage as this location may represent your place of work. Make sure you take professional advice before claiming for travel/mileage as incorrect claims can result in penalties.
If you opt to rent a desk or an office, then again the cost of doing so is an allowable expense and will reduce your taxable income.
It is advisable that those that are self employed take out some form of insurance. Generally this insurance covers Public Liability Insurance, Products Liability Insurance and Malpractice. Again, these insurance costs will be an allowable expense.
You may opt to take courses to improve skills. These may be tax allowable so keep your receipts ready for when you need to submit your tax return. If you need to travel to your course or stay overnight as part of the training these costs are also tax deductible, as well as the cost of a basic meal for lunch/dinner. Take the time to collate your receipts or note down mileage so you can discuss your claim against your taxable income with your accountant.
Wages and Freelancers
If you need some assistance and support from others then the cost of these individuals will be tax allowable since they are an incidental cost of your project(s).
Any marketing you do (online or offline), paid ads or anyone you pay to help you with your marketing is also fully allowable so make sure you download or ask your marketing assistant to send you an invoice before you pay them.
Keeping accurate business records will help to avoid missing any entitlements or tax relief that you may be eligible for. My bookkeeping spreadsheet is perfect to help you organise your business finances and it comes with a handy guide to help you get started as well as advice on your regular bookkeeping tasks and a built in tax estimator.
If you buy a bookkeeping spreadsheet and use an accountant to help you complete your self assessment tax return, then all these costs would be tax allowable.
It is advisable to open a business bank account and keep your business and personal expenditure separate. The bank charges you pay on your business bank account is an allowable expense.