Self Employed Consultant? Here is our tax advice guide just for you. Whether you are starting out or just want to understand more about allowable expenses, here are some useful tips specifically for Self Employed Consultants.
THE FOUR ESSENTIALS OF SELF EMPLOYMENT
Let’s start by summarising the four essential elements of Self Employment:
- Visit the HMRC website and register as Self Employed
- Keep a list of all business income and expenditure (expenses)
- Complete Self Assessment before 31 Jan each year
- Pay any Tax and National Insurance due by 31 January each year (and payments on account by 31 January and 31 July each year)
Register with HMRC as a Self Employed Consultant
First things first, you must register with HMRC for Self Assessment and Class 2 &4 National Insurance. This should be done as soon as possible after starting your business but HMRC rules are that you must register by 5 October in your business’s second tax year.
You can register as a Self Employed Consultant on HMRCs website here. Once this process is completed HMRC will send you a UTR number (Unique Tax Payers Reference). Keep this safe as you will need this code to file your Self Assessment Tax Return. As you are self employed you are required to pay tax under Self Assessment which means you need to submit a personal Tax Return by 31 January each year detailing your trading income, the income tax and Class 2 & Class 4 National Insurance due as well as making a payment for the tax and NI due. Your tax return submitted by 31 January covers the previous tax year. For example: your tax return due on 31 January 2018 details your trading income earned between 6 April 2016 to 5 April 2017.
Watch out, you are also required to make a payment on account to HMRC by 31 July each year too which is normally 50% of your previous years tax bill, so make sure you budget for this additional payment too.
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 CFW1 to notify HMRC that you have a new form of income you need to report on. Again, you can do this online here and you will need your Unique Tax Payers Reference.
WHAT ARE ALLOWABLE EXPENSES?
Your trading income, somewhat deceivingly, actually means your trading profits (all your income less all your allowable business expenses) and it is this figure that your tax and national insurance bill is based on. Generally speaking, business expenses are only tax allowable if they are ‘wholly, necessarily and exclusively’ incurred in the performance of your business. But it is really important to be aware of which expenses are allowable because they will reduce your tax bill and incorrect claims can result in penalties. Expenses must be supported by a receipt, so always make sure you keep hold of all your paper or emailed receipts so they are ready for tax time.
Typical Allowable Expenses for Self Employed Consultants
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 fully allowable and some may attract Annual Investment Allowance (AIA), which is another way of making tax savings. So keep all the receipts of your equipment so you can discuss deductions with your accountant.
Websites is quickly becoming 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 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 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. Make sure you have an idea of your household running costs to discuss with your accountant at tax return time as they will help you work out how much you can claim against your taxable income.
Alternatively, HMRC allows you to claim a flat rate of £4 per week for using your home for work purposes and you don’t need to substantiate this claim with receipts.
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.
The cost of an accountant to complete your self assessment tax return will be an allowable expense. Keeping accurate records will definitely help keep their fees down too as well as giving them all the information they need to make sure you receive all the deductions and reliefs to reduce your tax liability.
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.
RECORDING YOUR BUSINESS TRANSACTIONS
It is likely you may be paid in cash or via bank transfer and, like any self employed sole trader, it’s important to keep accurate business activity records and be aware of any entitlements or tax relief that you may be eligible for. Doing so will make life easier when the time comes to completing Self Assessment. Incomplete or inaccurate records will demand more time and hike up any accounting costs. Don’t forget that failure to declare all forms of income could result in prosecution and a fine from HMRC. Accurate returns are important as they affect a person’s eligibility and ability to get things like mortgages and other types of credit finance.
A simple spreadsheet which records your income and expenses is a great start to keeping your business transactions logged and organised. You read some of our tips to keeping your accounts organised here.