Author: Abbie Glew

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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.