Author: Abbie Glew

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Spring Statement Update 2022

The Chancellor of the Exchequer, Rishi Sunak, delivered his Spring Statement on Wednesday 23 March 2022.

To find out how these announcements will impact you and your business in a simple easy to understand way, check out our updates.

National insurance contribution (NICs) increases

National insurance contributions paid by employees, employers and the self-employed are increasing by 1.25% from April 2022.

This is to provide additional funds for health and social care.

National insurance threshold increases 

It’s not all bad news though…some new measures have been announced in an attempt to reduce the effect of the increase, at least partially and that’s the increase in the starting NIC threshold for individuals.

The annual level at which employees and the self-employed start to pay NICs was due to increase from £9,568 to £9,880 from 6 April 2022.

This increase will go ahead but be further uplifted to £12,570 from 6 July 2022, effectively aligning the point at which an individual starts to pay NICs with the £12,570 income tax personal allowance.

In the tax year to 5 April 2023, this is a NIC cut worth £267 for most employees and £207 for most self-employed individuals.

Importantly, this will more than negate the impact of the 1.25% NIC increase for most workers with employment earnings of less than £34,000, providing them with a small contribution to the increased cost of living.

The starting NIC threshold for the self-employed and company directors is computed on an annual basis and so will be set at a pro-rata sum of £11,908 for the whole of the tax year to 5 April 2023, before increasing to £12,570 in the tax year to 5 April 2024.

Class 2 NIC liabilities of the self-employed

For the self-employed, some individuals will find that they no longer need to pay Class 2 NICs from April 2022. The small profits threshold will be set at £6,725 as planned, but the requirement to pay Class 2 NIC will only apply to those with self-employed profits over £11,908.

This will benefit approximately 500,000 self-employed individuals by saving them £165 a year.

From 6 April 2023, Class 2 NIC will only be payable by those with profits over £12,570.

What about employers?

No changes have been made to the annual level at which employers’ NIC start to apply; namely £9,100 for most employees in the tax year to 5 April 2023.

However, the Employment Allowance, which allows eligible businesses to reduce their employer NIC cost, will increase from £4,000 to £5,000 for the tax year to 5 April 2023.

It is expected that 495,000 businesses will benefit from this increase, with most saving £150 in the tax year to 5 April 2023.

If we operate your director payroll look out for an email from us in due course that will identify the new tax optimum salary for April 2023 onwards.

Dividend tax rates are changing

From April 2021 the dividend tax rates are increasing by 1.25% in line with the increase to national insurance contributions.

Your first £2,000 of dividends remain tax free.

Dividends under the basic rate threshold of £50,270 will be taxed at 8.75%.

Dividends within the higher rate threshold of between £50,271 and £150,000 will be taxed at 33.75%.

Dividends over the additional rate threshold of £150,001 will be taxed at 39.35%.

Income Tax

The Chancellor has committed to reduce the basic rate of income tax from 20% to 19%, but not until 6 April 2024.

It is estimated that this will save 30 million individuals an average of £175 per year.

Corporation Tax

The main rate rises to 25% from 19% from April 2023 – so a 6% increase.  Businesses with profits below £50k will still pay 19% and there will be a taper for businesses with profits between £50k and £250k.

VAT registration threshold

No changes to the VAT registration threshold. You must register for VAT if your sales go over the current registration threshold in a rolling 12-month period. This is not a fixed period like the tax year or the calendar year – it could be any period, for example the start of June to the end of May.

National Minimum/Living Wage increases

The NLW and NMW rates from 1 April 2022 are:

Rate from April 2022 Current rate (April 2021 to March 2022) Increase
National Living Wage £9.50 £8.91 6.6%
21-22 Year Old Rate £9.18 £8.36 9.8%
18-20 Year Old Rate £6.83 £6.56 4.1%
16-17 Year Old Rate £4.81 £4.62 4.1%
Apprentice Rate £4.81 £4.30 11.9%
Accommodation Offset £8.70 £8.36 4.1%

Business Tax Relief for Capital Investment

In preparation for the 130% ‘super-deduction’ for companies coming to an end on 31 March 2023, other alternatives are being considered in an attempt to continue encouraging investment from April 2023.

In the meantime, the reliefs potentially available (to companies and non-corporates) for expenditure on plant and machinery includes:

  • A £1million annual investment allowance;
  • 130% and 50% super-deductions;
  • 100% first-year allowances (including on electric cars); and
  • 18% and 6% writing down allowances.

The date of acquisition of capital assets can make a difference to the tax relief you can claim so do speak to us before your next sizeable investment but remember we will automatically review any reliefs for capital investments as part of the work we do on your accounts.

Fuel Duty

Fuel duty has been cut by 5p per litre for 12 months from 6pm on 23 March 2022.

The Treasury report that this will save the average car driver £100 a year and the average van driver £200 a year.

GIFT AID YOUR DONATIONS TO HELP UKRAINE

For individuals and businesses wanting to donate money to help to support those suffering in Ukraine, there are a number of charities providing humanitarian relief. Ideally, this should be done via the Disasters Emergency Committee (DEC) Appeal at www.dec.org.uk/.

Individual UK taxpayers should make sure to tick the Gift Aid box as that will increase their donation by 25%. It should also be remembered that, like pension contributions, higher and additional rate taxpayers are able to obtain even more tax relief. For example, a £40 donation only costs £30 after higher rate tax relief.

Household Support Fund

The Household Support Fund will be doubled to £1billion from April 2022. The Fund will help households with the cost of essentials such as food, clothing and utilities.

Green Technology

Green technology, including solar panels and heat pumps, will be exempt from business rates in England from April 2022, a year earlier than originally planned.

VAT on Energy Saving Materials (ESMs) installed in residential accommodation will be reduced from 5% to 0% from this April in Great Britain. The 0% rate will apply until 31 March 2027.

A 100% relief for eligible low-carbon heat networks which have their own rates bill will also be available.

VAT Rates in the Leisure and Hospitality Sector

No extension has been granted to the leisure and hospitality sector for use of the reduced 12.5% VAT rate on eligible supplies including food, non-alcoholic beverages and hotel and holiday accommodation. The VAT rate applied to these supplies will revert to 20% from 1 April 2022 as planned.

Research and Development (R&D)

The R&D tax relief schemes for companies will be enhanced from April 2023 but we have to wait until this summer for more details.

We do know the reform is set to boost sectors where the UK is a world-leader, including artificial intelligence, robotics, manufacturing, and design.

Capital Gains Tax

No changes to rates, no major changes to allowances/exemptions. Annual exemption frozen.

Inheritance Tax

No changes to rates, no major changes to allowances/exemptions. Nil Rate Bands frozen.

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Why Xero is the Best Small Business Accounting Software

What is Xero cloud based accounting?

Xero is an innovative cloud based accounting software that has all the tools you need to grow and scale your small business. It is a software that understands both the necessity and pain of accounting for small business owners and introduces a number of solutions for each through its simple to use functionality and integrations.

You are able to view and share interactive reports and budgets, import bank transactions, send invoice reminders and much more. Whether you’re setting up a new business or migrating your existing business accounts, Xero is a fast and simple software that will help you to spend less time in spreadsheets and more time focusing on your business.

7 Reasons why Xero is the best all round accounting software for small businesses

Xero is used by millions of small businesses worldwide and can be easily accessed anywhere via the cloud. We have listed 7 of the best reasons why Xero is and continues to be the best accounting software solution for small businesses.

If you are interested in using Xero for your business regardless of size, please contact us to talk about the range of pricing packages available.

1. Time saving capabilities

Xero gives you the opportunity to take control of your business finances anywhere in the world via the mobile app and simple online log in. Xero helps to create endless efficiencies by reducing the amount of time you spend manually inputting your finances. You can view real time financial details including information such as outstanding invoices and bills as well as set up rules, repeating invoices and much more.

2. Automated Bank Feeds

Xero automate bank feeds, this means that instead of manually importing bank statements into Xero, you can connect your bank and credit card account directly to Xero, which reduces the likelihood of error. With these being automated, it’s going to save you a lot of time and it’s a more efficient way to manage your accounts.

3. User-Friendly

One of the biggest benefits of Xero is how user-friendly it is. The whole system is easy to navigate your way around and the terminology is easy to follow. Even without in-depth accounting knowledge, Xero is simple to understand and use which is what makes it so great for small business owners.

4. Always Improving

Like any system, there is always room for improvement. The great thing about Xero is that they release monthly product updates to keep you up to date with any changes and improvements. Cloud-based software can be used on any devise with internet connection, keeping small business owners connected with their business and accounts. Xero are working on flexibility with remote working, making data fluid and accessible.

5. Payments made easier

Late payment of invoices are a big problem in the UK, but using Xero is a great way to prevent cash flow issues. Xero allows you to see when an invoice has been opened, send statements to customers, set up automatic reminders and maintain your customer accounts quickly and efficiently.

6. Making Tax Digital

Making Tax Digital is a key part of the government’s plan to make it easier for businesses to get their tax right and keep on top of their finances. Making Tax Digital means you are no longer able to keep and submit manual VAT records and returns.

Instead, HMRC will only accept VAT returns sent using software that supports Making Tax Digital for VAT, such as Xero. This is now mandatory, for VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000).

HMRC also have plans for Making Tax Digital for income tax and corporation tax in the not to distant future and Xero are committed to ensuring they remain compliant with HMRC requirements, this means your business will be future proofed for evolving tax legislation.

7. Xero integration with apps

Xero integrates with hundreds of apps that small businesses use and this makes the process and interaction between them seamless and efficient. We have included a few examples below but there are many more in the Xero app section that may be relevant to your business.

Dext

A big challenge for small business owners is keeping their books and records up to date and understanding their financial position, Dext and Xero can help small business owners to take control of their finances.

Dext is a data capturing tool which extracts key data from documents and then creates transactions in Xero at the click of a button. Dext allows you to email bills and receipts straight into your Dext organisation as well as link direct to specific supplier accounts.

Dext is easy to use, with a mobile app to upload a photo and set up automated connections so whenever you get a bill from a supplier it goes straight into Dext. Like Xero, you can invite your accountants, bookkeepers or team members into your Dext organisations and decide how much visibility you want them to have.

Dext also stores documents therefore you are not required to keep any paper copies of bills and receipts freeing up space and reducing paperwork.

Hubspot – CRM integration

HubSpot’s CRM platform has all the tools and integrations you need for marketing, sales, content management and customer services. Xero and HubSpot integrate together for visibility into your customers’ journey and time saving.

HubSpot helps develop those leads your website attracts, meaning you can start to build better relationships with potential clients and existing clients through personalised conversations.

GoCardless

Collecting payments, chasing invoices and subscriptions can be time consuming and can put people off starting a business, however with GoCardless you don’t need to worry about that. It is made for recurring payments and puts you in control of when you get paid.

GoCardless is made for businesses that bill their customers on a recurring basis. It’s ideal for collecting payments for both intermittent and repeating invoices.

The GoCardless and Xero integration will end late payments, predict your cash flow, reduces bookkeeping and international payments are available with no mark-up on foreign exchange.

GoCardless and Xero has a simple setup. You are able to create a GoCardless account directly within Xero, you then send out your invoices and GoCardless will automatically collect payments when they are due. Once payment has been received through GoCardless, the invoice in Xero will be marked as ‘paid’. GoCardless is a lower cost alternative to card payments and helps take the stress away from invoicing.

Workflow Max

Manage your workflow from quotes through to invoicing while tracking time and costs. Improve your project budgeting and gain critical insights into your business. Workflow Max and Xero integration is designed to improve profitability and gain insights. Workflow Max can configure to suit the needs of your business and track leader, proposals and sales pipeline all in one place.

Convinced that Xero is for you but need some training on how to use the software?

We are certified Xero advisors here at The Orenda Collective and we offer Xero training packages to clients and non-clients alike.

Some of the topics covered on the basic training include:

  • Xero set up including organisation settings, financial information and branded invoice templates
  • Connecting Xero to your bank through bank feeds
  • Changes to the standard chart of accounts to make your accounting template bespoke to your business
  • How to raise an invoice, send it directly to a customer, chasing the invoice with customer statements and reconciling the payment received against the invoice
  • How to enter bills and receipts from your suppliers/ providers and how to reconcile the payment against the expense
  • Reconciling the bank (a key control!)
  • How to access reports and meaningful data within Xero and what it all means to you as a business owner
  • Q&A time for you to go through any questions and concerns you may have

Our 60 minute training sessions are £150 and include a 15 minute call in advance of the training to ensure we set your training outcomes and cover anything specific to you within the session.

For more information or to discuss a tailored Xero training program please contact us.

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Does my business need to operate a workplace pension?

What is a workplace pension?

A workplace pension is a way of allowing an employee to save for their retirement that’s arranged by the employer.

Some workplace pensions are called ‘occupational’, ‘works’, ‘company’ or ‘work-based’ pensions.

Under the Pensions Act 2008, every employer in the UK must put certain staff into a workplace pension scheme and contribute towards it. This is called ‘automatic enrolment’. If you employ at least one person you are an employer and you have certain legal duties.

How do workplace pensions work?

A percentage of your employee’s pay is put into the pension scheme automatically every payday.

In most cases, the employer adds money into the pension scheme too. The employee may also get tax relief from the government.

Does Auto-enrolment apply to my business?

Whether you’re a coach, a graphic designer, have a marketing business, or a photographer, you are an employer from the day your first member of staff started working for you and you have legal duties.

If you are employing staff for the first time, your legal duties for automatic enrolment begin on the day your first member of staff starts work. This is known as your duties start date. You should start preparing early in anticipation of this, so you know what you’ll need to do.

Does my business have to operate a workplace pension?

All employers must provide a workplace pension scheme. This is called ‘automatic enrolment’.

Employers must automatically enrol employees into a pension scheme and make contributions to the pension if all of the following apply:

  • They are classed as a ‘worker’
  • They are aged between 22 and State Pension age
  • They earn at least £10,000 per year
  • They usually (‘ordinarily’) work in the UK (read the detailed guidance if you’re not sure)

Are there any situations when my business does not have to operate a workplace pension?

The employer usually does not have to automatically enrol a worker if they do not meet the previous criteria noted above or if any of the following apply:

  • They’ve already given notice to you that they’re leaving their job, or you’ve given them notice
  • They have evidence of their lifetime allowance protection (for example, a certificate from HMRC)
  • You have already included the worker on a pension that meets the automatic enrolment rules and you the employer arranged it
  • You made a one-off payment to a workplace pension scheme that’s closed (a ‘winding-up lump sum’), and then the worker leaves and re-joins the same job within 12 months of getting the payment
  • more than 12 months before the staging date, the worker left (‘opted out’) of a pension arranged by your employer
  • The worker is from an EU member state and they are in an EU cross-border pension scheme
  • The worker is in a limited liability partnership
  • The worker is a director without an employment contract and employs at least one other person in your company

Does my business have to contribute to a workplace pension for my employees?

An employer does not have to contribute to an employee’s pension if they earn these amounts or less:

  • £520 a month
  • £120 a week
  • £480 over 4 weeks

If an employee earns less than £10,000, but above £6,240, the employer doesn’t have to automatically enrol the employee in their scheme however, if they join, the employer will be unable to refuse you and must make contributions on the employees behalf.

Do I need to auto-enrol my employees?

What you need to do will depend on whether you’re about to start your automatic enrolment duties or whether you’re coming back for re-enrolment.

The pension regulator has a useful Q&A tool that will help you determine when and if you need to auto-enrol your employees that we recommend you use, but below is a useful summary.

Type of employee Eligible jobholder Non-eligible jobholder Entitled worker
Age 22-State Pension age 16-74 16-74
Earns £10,000+ £6,240-£10,000 Below £6,240
Auto enrolment status Must be auto enrolled Can ask to join Can ask to join
Employer contribution status Employer contributions required Employer contributions required Employer contributions are required in line with our Scheme rules.
  • You’re only required to auto enrol eligible jobholders. You must pay contributions towards their pension savings. You must enrol eligible jobholders even if they say they don’t want to join the Scheme.
  • Non-eligible jobholders can ask to join the Scheme. If they ask, you must put them in and pay contributions towards their pension savings.
  • Unless you have alternative pension arrangements for entitled workers, they can also ask to join the Scheme and you must put them in.

What does my business have to tell an employee when they are auto-enrolled?

The business must write to the employee when they’ve been automatically enrolled into the workplace pension scheme. You must tell them:

  • the date you added them to the pension scheme
  • the type of pension scheme and who runs it
  • how much they’ll have to pay in and how much you’ll contribute
  • how to leave the scheme, if they want to
  • how tax relief applies to them

So you have established you need to auto-enrol your employees, what next?

Your automatic enrolment duties start when you employ your first member of staff (duties start date).

You have 6 weeks from your duties start date to set up a pension scheme.

Step by step guide to fulfil your duties:

  1. Choose a pension scheme: Choose a pension scheme that can be used for automatic enrolment and put your staff into it. Do this as soon as possible as it may take time.
  2. Work out who to put into a pension scheme: Work out who you need to put into a pension scheme on your duties start date. Do this on your duties start date.
  3. Write to your staff: Use the pension regulator letter templates to write to each member of staff individually to tell them how automatic enrolment applies to them. Do this within 6 weeks after your duties start date.
  4. Declare your compliance: Use the pension regulator declaration of compliance checklist to find out what information you’ll need to provide to them how you’ve met your duties. You must complete your declaration by your deadline or you may be fined. Do this within 5 months after your duties start date

How much has to be contributed to the auto-enrolment pension scheme?

Any worker who earns over the lower threshold for qualifying earnings is called a jobholder. You’ll have to make a minimum contribution into their retirement pot.

Workers earning less than the lower threshold of qualifying earnings are called ‘entitled workers’ or ‘workers without qualifying earnings’. For these workers, you don’t have to make a minimum contribution, but you can if you want to.

There are several ways you can calculate contributions for auto enrolment. There are statutory minimum contribution levels, but you can choose to set higher contribution levels if you want to.

Qualifying earnings

This is the minimum basis for calculating auto enrolment pension contributions.

Basic earnings

These include basic pay, holiday pay, and statutory pay such as sick pay or parental leave pay. They don’t include bonuses, commission, overtime, and similar payments.

If you use basic earnings to calculate auto enrolment pension contributions, the minimum contribution to an employee’s pension savings is 9%. Employers must pay at least 4% and the employee the remaining 5%.

Total earnings

These are all earnings including basic pay, holiday pay, sick pay, bonuses, commission, overtime and similar payments. If you use total earnings to calculate auto enrolment pension contributions, the minimum contribution to an employee’s pension savings is 7%. Employers must pay at least 3% and the employee the remaining 4%.

These are all earnings including basic pay, holiday pay, sick pay, bonuses, commission, overtime and similar payments. If you use total earnings to calculate auto enrolment pension contributions, the minimum contribution to an employee’s pension savings is 7%. Employers must pay at least 3% and the employee the remaining 4%.

Definition Qualifying earnings Basic earnings Total earnings
Includes All earnings between a lower and upper limit set by the government and reviewed each year. Basic pay, holiday pay and statutory pay such as sick pay, but not bonuses, commission, overtime and similar payments. All earnings including basic pay, holiday pay, sick pay, bonuses, commission, overtime and similar payments.
Total minimum contribution 8% 9% 7%
Employer 3% 4% 3%
Employee 5% 5% 4%

What are qualifying earnings?

Qualifying earnings is a band of gross annual earnings that can be used to work out what contributions a worker should get. It includes a worker’s salary, overtime, bonuses and commission, as well as statutory sick, maternity, paternity or adoption pay.

For the 2023/24 tax year it’s anything over £6,240 and up to £50,270.

How much is the minimum contribution?

The legal minimum for jobholders is currently 8 percent of their qualifying earnings. Of this, you need to pay at least 3 percent. The remainder comes from your workers’ pay, which you’ll have to collect and send to your pension provider, and tax relief from the government. The pension provider will claim the tax relief on your workers’ behalf.

You can pay more if you want to. Some employers pay all of their workers’ minimum contributions or pay additional amounts on top of the minimum. This is a good way of attracting and keeping good workers in your organisation.

The table below outlines the minimum contributions:

Date Minimum contribution What you’ll pay What your worker pays What the government pays
From 6 April 2019 8% 3% 4% 1%

How do you work out the minimum contributions?

The minimum contribution is a percentage of a worker’s gross annual earnings that fall within the qualifying earnings band.

For the 2023/24 tax year this means that the first £6,240 of their earnings isn’t included in the calculation. For example, if a worker earned £20,000 in 2023/24 their qualifying earnings would be £13,864 and their annual minimum contribution would be based on that.

Because you pay contributions every time you pay your workers, you’ll need to work out qualifying earnings for each pay period and make your contribution based on these amounts. There may be pay periods when workers don’t earn enough to qualify for a minimum contribution.

The table below shows the lower and upper levels of qualifying earnings for some commonly-used pay periods. You’ll need to make a contribution based on everything they’re paid over the lower level and up to the upper level.

Pay period Lower Level of qualifying earnings Upper level of qualifying earnings
Weekly £120 £967
Fortnightly £240 £1,934
Four-weekly £480 £3,867
Monthly £520 £4,189

What is the duties start date?

Your legal duties for automatic enrolment begin on the day your first member of staff starts work. This is known as your duties start date and you cannot change this date.

Can I use postponement?

One of the main reasons you might decide to delay working out who to put into a pension scheme is if you have seasonal or temporary staff who you know will stop working for you within three months. You can also use it for staff who begin work on a probationary period or if you need more time to set up your pension scheme or other business processes. But you can choose to use postponement for any other business reason.

When you can postpone?

You can only postpone automatic enrolment from:

  • your duties start date
  • a staff member’s first day of employment
  • the date a staff member first meets the age and earnings criteria to be put into a pension scheme that you also pay into.

Remember, if you use postponement on your duties start date it only changes the day on which you need to assess your staff, it doesn’t change your duties start date or your declaration of compliance deadline. You can only use postponement if you’re within six weeks of the date that your member of staff met the age and earnings criteria to be put into a pension scheme.

How do I use postponement?

You must write to each member of staff individually to tell them that you have delayed working out who to put into a scheme and how automatic enrolment applies to them. You will have six weeks to write to them from the date after postponement starts. There’s no need to tell us that you’ve decided to use postponement.

You can postpone for up to three months. You can postpone as many or as few staff as you like and the postponement period doesn’t have to be the same length for everyone.

If any of your staff write to you asking to join a pension scheme during the postponement period, you must put them into one once you have received their request.

You will have to pay into the pension scheme if they are:

  • aged 16-74
  • and earn at least £520 a month or £120 per week.

To find out how much you will need to pay you should ask your pension scheme provider.

Do I have any on-going duties?

Each time you pay your staff (including new starters), you must monitor their age and earnings to see if they need to be put into a pension scheme and how much you need to pay in. Find out more about your ongoing duties.

When does automatic enrolment apply to a director?

You will have automatic enrolment duties:

  • if the director has a contract of employment with your organisation and at least one other person (who can be another director or a member of staff) also has a contract of employment with your organisation
  • if you have multiple directors and no other staff – and at least two of the directors have employment contracts – all the directors with employment contracts will be members of staff and subject to automatic enrolment duties

When does automatic enrolment not apply to a director?

You will not have automatic enrolment duties:

  • if a director does not have an employment contract, they are not considered a member of staff and do not need to be assessed for automatic enrolment – however if you have other staff, you’re an employer and will have duties for these staff – even if none of these staff meet the age and earnings criteria to be put into a pension scheme you must still complete a declaration of compliance
  • if your organisation only has directors without contracts of employment and no other staff
  • if your organisation only has one director with a contract of employment and no other staff

When should I reach out to an accountant?

Operating a payroll with or without auto-enrolment can be complex and time consuming. There is also a real possibility for penalties and employee disputes if the appropriate procedures are not followed.

We therefore recommend you reach out to an accountant ahead of employing any staff or paying yourself through payroll to reduce your risk.

If you need any support please do not hesitate to contact The Orenda Collective.

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Guide to Value Added Tax for Businesses | VAT Explained

What is VAT?

Value added tax is a general tax that applies to all commercial activities involving the production and distribution of goods and/or provision of services. VAT is a tax on consumer expenditure and is collected on business transactions, imports and acquisitions.

Most business transactions involve supplies of goods or services. VAT is payable if they’re supplies made:

  • in the UK or the Isle of Man
  • by a taxable person
  • in the course or furtherance of business
  • that are not specifically exempted or zero-rated

Supplies which are made in the UK or the Isle of Man and which are not exempt are called taxable supplies.

A taxable person is an individual, firm, company and so on who is, or is required to be, registered for VAT. A person who makes taxable supplies above certain value limits is required to be registered.

If the annual turnover of a business is less than a certain limit (the threshold), which does differ accordingly, the person or business does not have to charge VAT on the sales of services or products.

VAT is charged as a percentage of your product or service price. So if for example your product or service is £100 and the applicable VAT rate is 20%, you would charge £20 VAT (£100 x 20%) on top of your product or service price. This makes the total cost to your customer £120. You would then pass that £20 VAT over to HMRC via your VAT returns and keep the £100 as your sale value.

It’s important to understand how VAT works and how to calculate the correct amount that applies to your business. If in doubt we recommend reaching out to your accountant.

When do I need to register for VAT?

You must register for VAT when your VAT taxable turnover is over £85,000 (known as the threshold), or if you know it will be. Your VAT taxable turnover is the total of everything sold that is not VAT exempt.

When is it compulsory for my business to VAT register?

You must register for VAT if:

  • you expect your VAT taxable turnover to be more than £85,000 in the next 30-day period
  • your business had a VAT taxable turnover of more than £85,000 over the last 12 months

You might also need to register in some other cases, depending on the kinds of goods or services you sell and where you sell them.

If you’ll exceed the VAT threshold in the next 30-day period

You must register if you realise that your total VAT taxable turnover is going to be more than £85,000 in the next 30-day period.

You have to register by the end of that 30-day period. Your effective date of registration is the date you realised, not the date your turnover went over the threshold.

Example

On 1 May, you realise that your VAT taxable turnover in the next 30-day period will take you over the threshold. You must register by 30 May. Your effective date of registration is 1 May.

If you exceeded the VAT threshold in the past 12 months

You must register if, by the end of any month, your total VAT taxable turnover for the last 12 months was over £85,000.

You must register if it goes over the current registration threshold in a rolling 12-month period. This is not a fixed period like the tax year or the calendar year – it could be any period, for example the start of June to the end of May.

You have to register within 30 days of the end of the month when you went over the threshold. Your effective date of registration is the first day of the second month after you go over the threshold.

Example

Between 10 July 2020 and 9 July 2021 your VAT taxable turnover was £100,000. That’s the first time it has gone over the VAT threshold. You must register by 30 August 2021. Your effective date of registration is 1 September 2021.

What if neither you or your business are based in the UK?

There’s no threshold if neither your nor your business is based in the UK. You must register as soon as you supply any goods and services to the UK.

What if I register late for VAT?

If you register late, you must pay what you owe from when you should have registered.

You may get a penalty depending on how much you owe and how late your registration is.

Can I register for VAT even if I am not over the threshold?

You can register voluntarily if your business turnover is below £85,000. You must pay HMRC any VAT you owe from the date they register you.

What counts towards my VAT taxable turnover?

VAT taxable turnover is the total value of everything you sell that is not exempt from VAT.

To check if you’ve gone over the threshold in any 12-month period, add together the total value of your UK sales that are not VAT exempt, including in addition:

  • goods you hired or loaned to customers
  • business goods used for personal reasons
  • goods you bartered, part-exchanged or gave as gifts
  • services you received from businesses in other countries that you had to ‘reverse charge’
  • building work over £100,000 your business did for itself

Include any zero-rated items – only exclude VAT-exempt sales, and goods or services you supply outside of the UK.

Example:

Month Sales that are not exempt from VAT Rolling 12 month total Over £85,000 in VAT taxable supplies?
Start of trading:
February		  5,000.00
March  5,500.00
April  5,700.00
May  5,900.00
June  6,000.00
July  4,500.00
August  8,000.00
September  7,500.00
October  7,000.00
November  7,800.00
December  5,600.00
January  8,200.00  76,700.00  No
February  9,000.00  80,700.00  No
March  9,500.00  84,700.00  No
April  7,600.00  86,600.00  Yes – must register
May  7,800.00  88,500.00  Yes – stayed over
June  8,200.00  90,700.00  Yes – stayed over

What happens after I VAT register?

Once registered, you’ll need to complete regular VAT returns, these are usually quarterly, however other periods do sometimes apply.

This is where you declare how much VAT you have charged (output VAT) and how much you have paid (input VAT).

If you’ve charged more VAT than you’ve paid, you’ll have to pay the difference to HMRC. Conversely, if the company has paid more than you charged, you can claim this back from HMRC.

Are there different VAT schemes available?

Yes there are different schemes available, some of which listed below:

  • Retail schemes
  • Cash accounting
  • Second hand schemes
  • Annual accounting scheme
  • Flat-rate scheme

If you intend to use any of these schemes we recommend you discuss them with your accountant beforehand.

Can I reclaim VAT on my expenses?

VAT you have been charged on business expenses is called input VAT.

Input tax is the VAT you’re charged on your business purchases and expenses, including:

  • goods and services supplied to you in the UK
  • goods you import from outside the UK
  • goods you acquire into Northern Ireland from a taxable person in an EU member state (see The single market (VAT Notice 725))
  • goods you remove from a warehouse
  • any services supplied in the UK which you receive from abroad
  • overheads and research and development costs

What can be claimed as input tax on your VAT returns?

You can usually reclaim the VAT paid on goods and services purchased for use in your business.

Examples of items that may have VAT reclaimable (please note this list is not exhaustive):

  • Materials or goods purchased to enable you to make your product of provide your service
  • Computer of software costs
  • Accountants fees
  • Printing & Stationery
  • Marketing costs
  • Consulting costs
  • Equipment costs
  • Office costs

If a purchase is also for personal or private use, you can only reclaim the business proportion of the VAT.

Be careful to review the invoice/receipt to check whether the item actually had VAT on it before you reclaim input VAT. Also be sure to keep evidence of your input VAT.

What cannot be claimed as input tax?

You cannot reclaim VAT for:

What about expenses / purchases incurred pre-registration for VAT?

There’s a time limit for backdating claims for VAT paid before registration. From your date of registration the time limit is:

  • 4 years for goods you still have, or that were used to make other goods you still have
  • 6 months for services

You can only reclaim VAT on purchases for the business now registered for VAT. They must relate to your ‘business purpose’. This means they must relate to VAT taxable goods or services that you supply.

You should reclaim them on your first VAT Return (add them to your Box 4 figure) and keep records including:

  • invoices and receipts
  • a description and purchase dates
  • information about how they relate to your business now

What are the VAT rates?

  • Standard rate of VAT: The standard rate applies to most goods and services, which is currently set at 20%. You should charge the standard VAT rate of 20% on all goods and services unless they are classified as reduced, zero-rated or exempt.
  • Reduced rate of VAT: The reduced rate is set at 5% and only applies to some goods and services, for example children’s car seats, health, heating, mobility aids, energy and protective products and services. This rate depends on the type of item being sold as well as circumstances of it being sold.
  • Zero rate of VAT: Zero rated is as the name implies, it’s items that have a 0% rate applied to them. Zero rated isn’t the same as exempt items. Zero rate counts as a taxable supply, but you do not add any VAT to your selling price. Zero rate items include health, building, publishing, books, newspaper, motorcycle helmets, most goods you export to outside the UK and children’s clothes and shoes. Even though there is no VAT applied on zero rate goods, it is still a rate of tax. Therefore, it must be recorded in all VAT accounts and reported in VAT returns.

Exempt supplies:

Some goods and services are exempt from VAT. If all the goods and services you sell are exempt, your business is exempt and you will not be able to register for VAT. This means you cannot reclaim any VAT on your business purchases or expenses.

If you are VAT-registered and incur VAT on any items that will be used to make exempt supplies, you are classed as partly exempt.

There are some goods and services on which VAT is not charged, including: insurance, finance and credit, education and training, fundraising events by charities, subscriptions to membership organisations, selling, leasing and letting of commercial land and buildings – this exemption can be waived

VAT rates may change and you must apply these changes to the rates from the date they do change.

What should I include on my VAT invoices?

Only VAT-registered businesses can issue VAT invoices and you must:

  • issue and keep valid invoices – these can be paper or electronic
  • keep copies of all the sales invoices you issue even if you cancel them or produce one by mistake
  • keep all purchase invoices for items you buy

Valid invoices

You’ll use a full VAT invoice for most transactions. You can use:

  • a modified invoice for retail supplies over £250
  • a simplified invoice for retail supplies under £250 – and for other supplies from 1 January 2013

You cannot reclaim VAT using an invalid invoice, pro-forma invoice, statement or delivery note.

Include the following on your invoice, depending on which type you use:

Invoice information Full invoice Simplified invoice Modified invoice
Unique invoice number that follows on from the last invoice Yes Yes Yes
Your business name and address Yes Yes Yes
Your VAT number Yes Yes Yes
Date Yes No Yes
The tax point (or ‘time of supply’) if this is different from the invoice date Yes Yes Yes
Customer’s name or trading name, and address Yes No Yes
Description of the goods or services Yes Yes Yes
Total amount excluding VAT Yes No Yes
Total amount of VAT Yes No Yes
Price per item, excluding VAT Yes No Yes
Quantity of each type of item Yes No Yes
Rate of any discount per item Yes No Yes
Rate of VAT charged per item – if an item is exempt or zero-rated make clear no VAT on these items Yes Yes (1) Yes
Total amount including VAT No Yes (1) Yes

(1) If items are charged at different VAT rates, then show this for each.

Are there any other areas of VAT I should be mindful of?

Yes, VAT is a complex tax and there are lots of things you should be mindful of, some of which we have listed below:

  • If you trade with customers in the EU you should review the VAT and import/export changes as a result of Brexit
  • There are specific rules for trading with customers in Ireland that you should check and ensure compliance with
  • The ‘place of supply’ rules are intricate and complex and we recommend you ensure you are clear on the place of supply based on legislation
  • Record keeping is key, you must maintain specific records in support of the information included on your VAT return
  • Different products and services have different VAT rates
  • Making Tax Digital for VAT requires VAT-registered businesses, with taxable turnover above the VAT registration threshold, to keep records digitally and file their VAT Returns using software
  • Special rules that apply to digital sales

When should I reach out to an accountant?

Regardless of what type of business you have, VAT is very important and not something you can ignore.

Understanding the VAT rate that applies to your business and how you charge it correctly will help you to avoid any penalties, reclaim any VAT owed and to ensure your business is running successfully and efficiently.

Having the right accountant who understands your business, is on hand to answer questions and provide support will help you to stay organised and compliant with all of the VAT rules and regulations.

Failure to comply with the rules or registering late can be very costly and we highly recommend you reach out to an accountant to understand your obligations and get advice.

If you would like support please do get in contact with The Orenda Collective.

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Should I register as Self-Employed or a Limited Company?

Self-Employed vs Limited Company

Setting up a new business is an exciting period, though often we hear from business owners that they aren’t sure which structure is right for them. This guide will explain the high level advantages and disadvantages of each structure so that you can make an educated decision as to which structure suits you best.

As a self-employed individual you would be personally responsible for the businesses debts, meaning your personal assets could be at risk. Whereas operating as a limited company offers limited liability therefore reducing the risk to personal assets. This is because you and the company are seen as separate legal entities.

Generally speaking, limited companies stand to be more tax efficient than self-employed businesses, as instead of paying income tax companies pay corporation tax on their profits. Additionally, there is a wider range of allowances and tax deductible costs that a limited company can claim against its profits compared with a self-employed business.

Both self-employed individuals and directors of limited companies are required to submit a Self-Assessment to HMRC, but those operating a limited company must also submit extra paperwork to regulatory authorities (CT600, Annual Accounts to Companies House, Confirmation Statements, VAT returns if VAT registered and Payroll submissions if operating a Payroll). The administrative burden of a self-employed individual is therefore considered less than that of a limited company.

Key points to consider when determining whether to register as Self-Employed or a Limited Company?

  1. Expected income and profits of the business
  2. Your other earnings and personal tax position
  3. The level of personal risk or financial liability you are comfortable taking
  4. Brand perception and customer preferences
  5. Future plans and flexibility required for the business

Deciding on the best legal structure for your business is a crucial decision and one we recommend you consider carefully, where possible taking the advice of an appropriately qualified accountant.

There are a number of advantages and disadvantages for each structure that you will need to weigh up in order to determine which business structure is best for you.

What does being self-employed or a sole trader mean?

A self-employed individual, often known as a sole trader, does not work for a specific employer who pays them a consistent salary or wage. Self-employed individuals earn an income by offering their services or products directly to customers or businesses. They are required to win work or customers themselves and take responsibility for the success or failure of the business

Sole traders often have multiple customers at one time, and are responsible for determining their own working pattern and place of work. Additionally, they are generally required to provide any tools or equipment required to complete their service or product offering.

Examples of self-employed individuals are:

  1. A hairdresser or beautician that provides their services from home, is responsible for buying the products required for treatments and for marketing their services to potential customers.
  2. A photographer that purchased their own photography equipment, schedules their own shoots and has multiple clients they take photos for.
  3. A coach that advertises their services, pays expenses such as insurance, zoom etc. and organises their coaching sessions directly with their clients.

What does operating as a limited company mean?

Many of the indicators of a sole trader also apply to owners of a company, however, instead of being self-employed you are considered both an owner (shareholder) and employee (director) of a limited company.

A Limited Company is a general form of incorporation that limits the amount of personal liability undertaken by the company’s shareholders and directors. This means that as a director and shareholder of a Limited Company, the business and you are seen as separate legal entities, which provides a layer of protection to your personal assets.

This means, that should the company fall on hard times and be unable to pay suppliers for example you as the business owner would not be responsible for settling the company’s debts with your personal funds.

Limited companies come in all shapes and sizes, some examples are:

  1. A marketing and branding company, that is owned 50/50 by 2 shareholders and directors, that employees 2 administrative staff on a casual basis and subcontracts specific client projects to self-employed individuals.
  2. A graphic design company that is owned by one shareholder and director that works with multiple clients on a fixed price project basis and from time to time subcontracts work during busy periods to other designers.
  3. A service provider that sells a variety of trade services to business and consumer customers

Self-employed/ sole trader vs limited company

Setting up as either structure will bring its own advantages and disadvantages, so starting with the self-employed option let’s delve into the detail.

Benefits of being Self-Employed

  • Relatively straightforward and easy to set up and register HMRC, the registration is also free
  • A simple way to operate your business without the administrative burden that comes with running a limited company. For example only required to file a self-assessment tax return for HMRC annually
  • Offers greater privacy than that of a limited companies whose details are published at Companies House
  • Broadly speaking self-employed businesses are easy to close and also simple to transition to a limited company in the future

Considerations of being Self-Employed

  • Sole traders or self-employed individuals have unlimited liability, as they’re not viewed as a separate entity by UK law. This means that if the business gets into debt, the business owner is personally liable. As such, self-employed individuals could lose personal assets if things go wrong
  • Raising finance can be tricky, as banks and other investors tend to prefer a limited business. This limits the expansion opportunities of sole traders or self-employed individuals
  • Tax rates on self-employed individuals aren’t always as favourable as they are on limited companies. When you reach a certain level of earnings, it might not be as lucrative to stay self-employed as the tax rates are higher
  • Clients or customers may see sole traders or self-employed businesses as less attractive than a limited business, this is because there is a certain prestige that comes with being limited

Benefits of being a Limited Company

  • Unlike a sole trader a limited company has the benefit of limited liability, as incorporation forms a legal distinction between the business owner and their business. This means that personal assets aren’t exposed – you only stand to lose what you put into the company
  • Once you’ve registered a company name nobody else can use it, in contrast to sole traders who aren’t offered the same protection, it is worth noting though that it does not give you the same protection as a trademark.
  • Generally speaking, limited companies stand to be more tax efficient than self-employed businesses, as instead of paying income tax companies pay corporation tax on their profits. Directors then extract personal income from the company through a combination of relatively low salary and dividends. You could for example take a salary below the tax-free allowance, and assuming you have no other income (e.g. from another job or a rental property) it would not be subject to tax and only attract minimal national insurance contributions if any. Then you could take the remainder of your required income as dividends assuming there is adequate profit generated, which are subject to lower tax rates than income tax. Additionally, there is a wider range of allowances and tax deductible costs that a limited company can claim against its profits compared with a self-employed business
  • A limited business has a certain level of prestige in terms of brand image that sole traders do not. Generally people consider a limited business as an established business, often making them appear more professional than sole-trader businesses, though in reality this may not always be the case
  • Operating as a limited company can make it easier to attract clients, investors and obtain debt compared with other business structures
  • As a director of a limited company, you can make company contributions to a personal pension scheme. This means the company gets the tax deductibility of the pension cost and the director doesn’t have to pay to take the money out of the company and then invest it into a pension, resulting in tax savings

Considerations of operating as a Limited Company

  • Operating as a limited company brings added responsibilities. These come in the form of what’s called the Director’s Fiduciary Responsibilities, which basically outline what a limited company director must do legally. You’ll need to file a yearly annual return for one, as well annual accounts
  • These added responsibilities of being a limited create a layer of cost as you will need to hire an accountant, compared with being self-employed where it is possible to do your tax return yourself (though many self-employed people opt to use an accountant due to the tax advisory element)
  • It can also be more time-consuming to operate a limited company, as you’ll need to deal with this extra responsibilities and paperwork, you will also need to pay a fee to register the company
  • In contrast to sole traders information on your business can be found via the company register, details on directors and your company’s earnings required to be shown publicly (though do bear in mind ‘small companies’ as defined by the Companies Act 2006 have less disclosure requirements). This sort of transparency may not appeal to all

Simple summary Self-employed vs Limited Company:

Sole trader/ Self-Employed

Limited company: you are director & shareholder
You are the business. The business is a separate legal entity.
You are the owner. You are a shareholder; you hold all or a proportion of the company’s share capital.
You are the manager or proprietor. You serve the company as its officer as a director.
In the event of any legal dispute, you will be sued personally unless you have suitable insurance e.g. products and services liability, professional indemnity, employer’s liability etc. In the event of any legal dispute, the company will be sued unless it has suitable insurance cover. It is exceptionally difficult and rare under UK law for anyone to sue a director personally for a company’s wrongdoing. It is worth noting however, that there are exceptions where the ‘corporate veil’ may be pierced and a director may be held personally accountable.

Employment status

You are self-employed; you cannot be your own employee.

Employment status

A director is an office holder, this does not automatically make you an employee in terms of employment law, the National Minimum Wage or for Tax Credits.

For Income Tax and National Insurance purposes company officers are treated as employees.

Insolvency

If the business fails you will be personally (or jointly with your partners) liable for its debts. You may go bankrupt.

Insolvency

If the company fails, your liability is limited to the amount unpaid on your shares (if any) unless you have made a personal guarantee for the company’s borrowing (which is often required by banks).

As a director, you can be held personally accountable if you continue trading when your company is insolvent and this causes financial loss to creditors. This could result in your personal bankruptcy.

Tax on profits

You pay Class 2 & 4 National Insurance and Income Tax on the taxable profits of your business.

Your profits are subject to income tax rates in the year you earned it.

Tax on profits

The company pays corporation tax on its taxable profits. Company tax rates are lower than higher rates of Income Tax.

Employees and officeholders are subject to PAYE and NICS on their earnings from employment and many benefits attract Income Tax too.

Shareholders are subject to Income Tax on Dividends.

Accounts

There is no requirement that you prepare accounts for tax purposes. You may find that it is difficult to keep on top of your business, collect debts and work out profits without keeping accounts.

You may need annual accounts to complete your personal tax return which includes a balance sheet section.

Your taxable profit under Self-Assessment must be prepared in accordance with Generally Accepted Accounting Practices (GAAP) for tax purposes unless you are cash accounting.

Accounts

You must prepare annual accounts under the provisions of the Companies Act, these can be abbreviated for filing with Companies House.

HMRC require full accounts for the CT600 which must be submitted online in iXBRL format.

Accounts must be prepared in accordance with accounting standards.

Related questions

What is a shareholder?

A share is a piece of a company, each piece represents a certain percentage of the company. Anyone who owns shares in a limited company is called a ‘shareholder’. The number of shares held by each shareholder determines how much of the company they own and control.

If you intend to be the sole company owner, you will need to be the sole shareholder of the company. However, if you intend for two or more people to own the Company you will need two or more shareholders. It is very important you consider what the share ownership structure will be and what the value of the shares will be.

Take note that if you have more than one ordinary shareholder any dividends you decide to take will be split by the percentage of your shareholding, for example, if two of you both have 1 share each then any dividends paid would be split 50% each.

What is a director?

A company must have at least one director. Directors are legally responsible for running the company and making sure accounts and reports are properly prepared.

This includes:

  • the confirmation statement
  • the annual accounts
  • any change in your company’s officers or their personal details
  • a change to your company’s registered office
  • allotment of shares
  • registration of charges (mortgage)
  • any change in your company’s people with significant control (PSC) details

You can hire other people to manage some of these things day-to-day (for example, an accountant) but you’re still legally responsible for your company’s records, accounts and performance.

When must I register as a sole trader/ self-employed person?

You must register as self-employed if you earned more than £1,000 from self-employment in a tax year. We recommend you register as soon as you have reached this limit, but the absolute latest you can register is 5th October following the end of the tax year.

When do I need to register a limited company?

You must register a company before you start trading, as effectively if you don’t you are just operating as a sole-trader/self-employed.

Am I self-employed if I have a limited company?

As a director of a company there are specific rules that mean you are treated as an office holder by HMRC, rather than self-employed. This means any payments you receive for your role as a director must be as salary and subject to PAYE.  This does not change the fact that if you are also a shareholder you can receive dividends from the company which are taxed as investment income rather than income tax.

Does a limited company have to be VAT registered?

A limited company does not need to VAT register automatically. The same rules apply whatever your business structure, they stipulate that you must register for VAT if your VAT taxable turnover goes over £85,000 (the threshold) or you know that it will. Your VAT taxable turnover is made up of the total of everything sold that is not VAT exempt.

You must register for VAT if:

  • You expect your VAT taxable turnover to be more than £85,000 in the next 30 day period
  • Your business had a VAT taxable turnover of more than £85,000 over the last 12 months

You may also need to register in some other cases, depending on the kinds of goods or services you sell and where you sell them.

Book a free consultation

Ultimately which option is right for you and your business depends on a number of factors, and is often a complex decision with lots of pros and cons of either business structure. That is why we always recommend speaking to an accountant before choosing either structure. We offer a free no obligation consultation so we can discuss your specifics, give advice and you will have the opportunity to ask questions so you feel confident and comfortable with your choice.

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How much tax do I need to save?

A common question asked, is how much tax self-employed individuals need to save to pay their tax bill at the end of the year. Often accountants give a complex answer, but we are here to change that. We will break it down into simple steps to make sure you understand what tax band is applicable to you, so your tax bill does not come as a surprise.

Step 1 – Estimate your profit for the year

How, I hear you ask?

  1. Total up all business income
  2. Total up all trade related expenses
  3. Business income less trade related expenses equals your estimated profit for the year

Step 2 – Determine what tax band you fall in based on your estimated profit

There are different rates depending on which tax band you fall in, so it is key that you get this bit right.

Estimated Profit Tax band Rate
£0 and £12,500 Personal allowance 0%
£12,501 and £50,000 Basic rate tax 20%
£50,001 and £150,000 Higher rate tax 40%
Above £150,001 Additional rate tax 45%

Step 3 – Apply the rates applicable to your tax band

Now you think it would be easy to work out your tax, right? Multiply your profit by the rates above, but there is a little bit more to it. Don’t worry though, we have given examples below to break it down for you!

Your profit falls between £12,501 and £50,000

In this example the profit is £35,000, but you can follow the same steps substituting your profit figure in. To estimate your tax, follow these steps:

  1. Profit (£35,000) – personal allowance (12,500) = £22,500
  2. £22,500 x 20% = £4,500
  3. Total tax to pay £4,500

Your profit falls between £50,001 and £150,000

In this example the profit is £75,000, but you can follow the same steps substituting your profit figure in. To estimate your tax, follow these steps:

  1. Profit (£75,000) – basic rate band (£50,000) = £25,000
  2. £25,000 x 40% = £10,000
  3. £50,000 – personal allowance (£12,500) = £37,500
  4. £37,500 x 20% = £7,500
  5. Total tax to pay = £10,000 + £7,500 = £17,500

Step 4 – Estimate your National Insurance

Self-employed individuals must pay Class 2 and Class 4 national insurance (“NI”).

Class 2 NI

If your profit is above £6,475 you must pay class 2 NI at £3.05 a week. This is equal to £158.60 a year.

Class 4 NI

Profit NI rate
Up to £9,500 No NI
£9,500-£50,000 9%
Over £50,001 2%

So, using the same examples as above:

Your profit falls between £12,501 and £50,000

In this example the profit is £35,000, but you can follow the same steps substituting your profit figure in. To estimate your NI, follow these steps:

Class 2 NI

£3.05 x 52 = £158.60

Class 4 NI

  1. Profit (£35,000) – NI lower profits limit (£9,500) = £25,500
  2. £25,500 x 9% = £2,295
  3. You will pay £2,295 of class 4 NI

Your profit falls between £50,001 and £150,000

In this example the profit is £75,000, but you can follow the same steps substituting your profit figure in. To estimate your NI, follow these steps:

Class 2 NI

£3.05 x 52 = £158.60

Class 4 NI

  1. Profit (£75,000) – NI lower profits limit (£9,500) = £65,500
  2. £65,500 – NI upper profits limit (£50,000) = £15,500
  3. £15,500 x 2% = £310
  4. NI upper profits limit (£50,000) – NI lower profits limit (£9,500) = £40,500
  5. £40,500 x 9% = £3,645
  6. £3,645 + £310 = £3,955
  7. You will pay £3,955 of class 4 NI

Step 5 – Bringing it all together

The last thing you want to do is add your tax, class 2 NI and class 4 NI estimates together, to arrive at your total expected tax bill.

Your profit falls between £12,501 and £50,000

Tax = £4,500

Class 2 NI = £158.60

Class 4 NI = £2,295

Total = £6,953.60

Your profit falls between £50,001 and £150,000

Tax = £17,500

Class 2 NI = £158.60

Class 4 NI = £3,955

Total = £21,613.60

Points of note:

  • This is for tax year 2020/2021 and only applies to those with ONLY self-employed income, if you have other forms of income get in touch and we will be happy to advice.
  • Your taxable profit will differ from your estimate due to the required adjustments made by your accountant, though this will be a good indication to get you started.
  • The above method is not a substitute for using an accountant to file your year end tax return to HMRC. This is because there are multiple factors that will impact your final taxable profit for submission to HMRC.
  • The above methods do not work if you earn over £100,000 as you begin to lose your personal allowance, but we don’t want to over complicate things. Feel free to reach out to us if you need help here.

If you follow the steps above, you should get a good indication of how much tax and NI to save, but as always, we are here to help! Please reach out to us if you have any questions.

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4 steps to finding your niche

Creative industries are all about self-expression, relatability and connection. But how do you find your niche? Your ideal customer, who values, and therefore pays for your craft, whose projects excites you and who’s network will bring you referrals.

This is one of the biggest challenges faced by new creative businesses, so how do you overcome it?

Step 1 – Evaluate your passions and skills

This sounds simple, but it is important. Don’t choose a niche because you are kind of into it, it must be something you’re passionate about, something you would do for free, and enjoy.

Ask yourself, how likely is it that I will be passionate about this in 5 years’ time?  If the answer is unlikely, get back to the drawing board, it is much harder to achieve success if you aren’t interested in what you are doing.

Consider your skillset, which areas do you have experience or particular skills in? What do people regularly tell you your good at? What comes naturally to you?

Identifying where your current skill set is, allows you to play to your strengths and puts you on the advantage from the start.

Step 2 – With step 1 in mind, it’s now time to get really clear on who your ideal client is

In a world where competition is steep and attention spans are stretched, it’s important to identify your niche. Trying to appeal to the many, often means you don’t appeal to any, and that is why we believe its important to define who your ideal client is.

Ask yourself these questions, and make sure you get specific:

  1. Is your ideal client male or female?
  2. How old are they?
  3. Where do they live?
  4. What type of business do they own or work for?
  5. What type of education do they have?
  6. What are their interests and passions?
  7. How much money do they have?
  8. Where do they spend their time?
  9. What are their pain points?
  10. How will you solve their pain points?

Step 3 – Check out the competition

Now’s the time to get your detective hat on, stalk if you will. Its crucial to assess the competition and identify what works well, and how you will get the competitive edge.

Get online and make key word searches for your niche and service.

  • Are there many businesses offering the same as you?
  • What is the quality of the offering?
  • How is yours different?
  • What do their reviews say?

Social media – most businesses will have social media and it’s a great way to understand how your competitors speak to your niche

  • Note which platforms get the most engagement
  • Note which posts get the most engagement
  • Identify any interesting facts about your competition
  • Sign up to their newsletters and grab their free resources!
  • Most businesses offer a newsletter or free piece of resource on their website and we highly recommend you sign yourself up to receive it. It will spark ideas, allow you to identify gaps and get insight into your competitors marketing strategy.

Have you got contacts who are in your niche? It’s always a good idea to speak directly to your people.

  • Find out what they like about their current service provider
  • What challenges they have with their current service provider and how these could be overcome
  • Ask for example pieces they loved, and ones they didn’t
  • Analyse the results of the both and let it drive your approach.

Step 4 – Consolidate your plan of action!

You have assessed your skills and passion, narrowed down your niche and stalked your competition, now its time to formulate your plan of action. This is the exciting bit, though the hard work isn’t over yet, we have listed below some key points to include in your plan of action.

  • Create an ideal client profile
  • Clarify and define your business goals
  • Identify your mentors and coaches
  • Use your learnings to drive your branding and marketing strategy
  • Write your business plan and get clear on your finances

If you have followed the 4 steps above, you should be well on your way to defining your niche, congratulations, that’s a big step!

Check out our other free resources for further tips and get in contact when you are ready to take your creative business to the next level.