Useful tips, help and links
You want to start up a new business, you've sorted your business plan, know your market and are ready to roll. Yet you're still unsure how to navigate the bureaucracy? These pages contain some helpful tips and some links back to some really useful HMRC guides and forms.
You and Her Majesty's Revenue and Customs
As soon as you enter into any kind of business activity, you will have to deal with HMRC. Right from the time you start, there are actions that need to be taken.
Firstly, you will have to notify HMRC that you have become liable for Class 2 National Insurance. This is something all sole traders (and partners in a partnership) have to pay, and is currently levied at the rate of £146.50 per annum.
You will have to register within 3 months from when you start in business. There is, however, a small earnings exception of £5,315 pa and £5,595 pa
Follow this link for how to apply for exemption of Class 2 NI. However, you should know that you need to have paid NI to qualify for the state pension, so think carefully before doing this.
Class 2 payments are now made twice yearly - 31st July and 31st January.
So you're in business - now what?
There comes a point in every self-employed persons life when they have to pay tax. Actually, this point comes twice a year, and includes something called
Class 4 National Insurance as well.
What you will need to do, is file a self assessment tax return each year. The deadline for filling a paper copy is 31st October, and the deadline for filling online is 31st January of the following year. As you have already notified HMRC as described above, you will most likely receive a paper copy in the mail around a month or so after 6th April, which, in case you didn't know, marks the start of the tax year.
Do not miss this deadline - there is an automatic penalty of £100 for doing so, even if you have no tax to pay!
What is Class 4?
Class 4 is distinct from Class 2 in that the latter is levied at a flat rate, regardless of how much you earn whereas Class 4 is calculated as a percentage of your taxable earnings. The calculation is fairly straightforward, but the rates and thresholds do tend to change each year.
Income tax too
Income tax is levied at 20% of taxable income above the personal allowance, which is £11,850 in the year ending 5th April 2019. I deliberately used
the term taxable income rather than taxable earnings, because income tax is levied on all classes of income, not just earnings. Calculation of income tax is complex, involving different rates for different levels of income and different classes of income. However, HMRC will calculate this for you.
Payment on account
You may have thought that you just file your tax return by 31st October (paper copy) and pay the tax due by 31st January. Unfortunately, it doesn't work like that. Although this is true in your first year, thereafter, you will have to pay tax in advance, based on the tax paid in the previous year. These
payments on account become due on 31st January in the tax year (ie, the tax year ends on 5th April) and 31st July just after the tax year. Each
payment comprises both income tax and Class 4 NI.
When the tax position is finally known, the balance of any unpaid tax (if any) is paid on 31st January, together with the first payment on account for the subsequent year.
Oh dear, whatever does that mean? Overlap profits are something that can occur if you make up your accounts to a date other than 5th April (or 31st March, which is treated as the same thing).
This happens because of the way HMRC collects tax. In your first year of trading, tax is levied on the business activity from when you started trading until 5th April. The complication arises in the second year, because in the second year, HMRC will collect taxes based on a whole 12 months of business activity.
Suppose you began trading on 1st October and decided to make your accounts up to 30th September each year. Your year-1 tax would be assessed on the 6 months to 5th April. However, in year 2, HMRC would assess the last 12 months of trading - 1st October till 30th September - and tax accordingly. But I've already paid tax on the first six months - now I'm taxed again.
Yes, and this is known as overlap profit. However, it is a rule that profits should be taxed once and once only, and there is a relief to reclaim the tax that occurred due to overlap profits. Overlap profit relief, as it is called, can be reclaimed - when you close the business!
Best solution - make your accounts up to 5th April (or 31st March if you prefer whole month cut-offs).
Doing Self Assessment
The next page guides you through some of the pitfalls in preparing your first self assessment.