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Self-employment and Tax: Part Time and Full Time

By: Jennie Kermode - Updated: 18 Oct 2012 | comments*Discuss
Tax Taxes Tax Preparation Self Employed

When you're self employed, it's important to understand how taxes work. Even when utilising the services of an accountant, a smart entrepreneur can save a lot of money through careful tax preparation. Whatever form of self-employment you're engaged in, whether you're working as a sole trader or as part of a small business, you'll have tax issues to deal with and, if you're successful, you'll have income tax or corporation tax to pay. It's a sad fact that many people avoid self-employment largely because they find dealing with tax forms too intimidating, especially as they're really much simpler than they look. With a bit of initiative, you can take charge of your employment situation and learn to deal with tax.

Self-Employment and Expenses

If you work from home, there are several specific tax issues you should consider. Most of these relate to expenses. You can declare a portion of your household bills, telephone and postage costs as expenses, thereby reducing the amount of tax you have to pay. If you have to travel for work related reasons, e.g. to visit a trade show, you may be able to declare your travel costs as expenses - however, you cannot claim travel expenses for journeys you make every day.

In order to claim expenses you'll need to keep a careful record of your outgoings. This means getting receipts for all relevant purchases (such as fabric, stationary and computer equipment) and storing them in a safe place. These will be balanced against your business income when you are assessed for tax.

Working as a Sole Trader

When you work as a sole trader, you won't need to deal with any special business tax forms - everything will be processed through ordinary income tax. Simply telephone the tax office on 0845 9154 515 when you're ready to start working and everything you need will be sent to you. Remember that it's important to fill in your tax forms on time, or you risk being subjected to fines.

If you earn less than your tax-free allowance (£5,435 for 2008-2009; soon to rise), you can wait until the end of the year to process your tax records through your annual income tax return. However, if you expect to be earning much more than this amount, it's a good idea to arrange to pay tax at the end of each month, which you can do by sending a cheque to your local Inland Revenue office. This means that you won't get hit by a big bill at the end of the financial year. If you've overpaid tax, you will be sent a cheque at the end of the year.

As a self employed person, you'll also have to pay your own National Insurance contributions. You will be sent a letter advising you on how to do this. National Insurance amounts to just £2.50 per week and paying it is simple.

If you have special needs or responsibilities, such as dependent children, you may be able to claim tax credits which have the effect of reducing your bill. Ask your local tax office about this.

Working with Other People

If you are part of a small business, your tax situation may differ from that described above. As part of a partnership your tax preparation should involve submitting an income and expenses statement for your business and taking responsibility for a proportion of that (say, one quarter, if there are four people in the partnership) as if you were a sole trader. However, if you work for a limited company, you will be treated as an employee even if the company is your own. This means that your tax will be processed as if you were working in any other job. Your tax preparation should then focus on paying corporation tax.

Where to Get Help

If you need help with working out your taxes, the following websites may be of use:-

  • The official government guide to money, tax and benefits (http://www.direct.gov.uk/en/MoneyTaxAndBenefits/index.htm) provides a clear breakdown of your responsibilities.
  • The Low Incomes Tax Reform Group (http://www.litrg.org.uk/) provides independent advice which can be very helpful if you're just starting out.
  • The HM Revenue and Customs website (http://www.workingforyourself.co.uk/) offers a simple guide to your tax status and tells you how to begin basic tax preparation.

The Inland Revenue run regular courses to help self-employed people learn how to deal with tax issues. Simply telephone your local office for details.

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