Following the mini budget update on Friday 23rd September 2022, we summarised the highlights and the details of the budgets. Subsequent to this, as has been widely reported, the government made a drastic U-turn!
Jeremy Hunt announced a statement on 17th October 2022, which effectively reversed a lot of the cuts promised by Liz Truss and the previous chancellor, and we have summarised the changes below.
Highlights
Income tax
Effective from 6th April 2023, the basic rate of income tax is being decreased to 19%.
Update 17 October 2022: Decrease cancelled.
The additional rate of income tax at 45% is being abolished and replaced with one single higher rate tax of 40%.
Update 17 October 2022: Additional rate of income tax at 45% reinstated.
Corporation tax
Corporation tax was set to rise from 19% to 25% on 6th April 2023, this has now been cancelled and corporation tax will remain at 19%.
Update 17 October 2022: The planned corporation tax rate rise to 25% has been reinstated.
Stamp duty
From 23 September 2022, you will not pay any stamp duty on the first £250,000 of the property value (doubled from £125,000) and first time buyers will now pay no stamp duty up to £425,000 (up from £300,000).
There has also been an increase in the value of the property on which first time buyers can claim relief from £500,000 to £625,000.
Update 17 October 2022: Stamp Duty cuts remain.
National insurance rates
The 1.25% rise in national insurance contributions which took effect earlier this year will be reversed from 5th November.
Update 17 October 2022: The National insurance rate reduction remains.
Contractors IR35
The government promised reform of IR35 tax rules for the self-employed which can result in them being taxed as if they were employees.
Reforms to the system introduced in 2017 and last year will be scrapped.
Update 17 October 2022: IR35 tax rules for the self-employed which can result in them being tax as employees reinstated.
Investment tax
The rise in tax on dividend income, which was linked to the rise in National Insurance rates will also be reversed.
Dividend tax from 6th April 2023 will be 7.5% for the basic rate and 32.5% for the higher rate.
Update 17 October 2022: The dividend rate reduction has been cancelled.
The detail
The Growth Plan 2022 makes growth the government’s central economic mission, setting a target of reaching a 2.5% trend rate.
They believe that sustainable growth will lead to higher wages, and greater opportunities and provide sustainable funding for public services.
Update 17 October 2022: Following the market turmoil caused by the mini budget on 23rd September it seems they have made dramatic U-turns on all their announcements. Who knows what their new economic mission is!
Income tax rates
The basic rate of income tax will be cut to 19% from 6th April 2023, 12 months earlier than planned.
This will apply to non-savings, non-dividend income for taxpayers in England, Wales and Northern Ireland.
A four-year transition period for Gift Aid relief will apply, to maintain the income tax basic rate relief at 20% until April 2027.
There will also be a one-year transitional period for Relief at Source (RAS) pension schemes to permit them to continue to claim tax relief at 20%.
The additional rate of income tax will also be removed from 6th April 2023. This will apply to the additional rate of non-savings, non-dividend income for taxpayers in England, Wales and Northern Ireland.
Update 17 October 2022: A cut in the basic rate of income tax – which had been promised by two chancellors this year, has been cancelled. Jeremy Hunt has said the basic rate of income tax will stay at 20% indefinitely. This means your income tax rates will remain unchanged.
The additional rate for savings, dividends and default rates will also be removed from 6th April 2023, and this change will apply UK-wide.
As the additional rate of income tax will be removed current additional rate taxpayers will also benefit from the Personal Savings Allowance of £500 for higher rate taxpayers.
Update 17 October 2022: The proposed abolition of the 45% additional rate of tax, which is paid by people who earn more than £150,000 a year, had already been ruled out.
National Insurance
From 6th April 2022, the rate of National Insurance contributions across all classes (except Class 2 and 3) was increased by 1.25%.
However, as announced on 23 September 2022, these rates are reverted to historical rates with effect from 6 November 2022.
Furthermore, the new Health and Social Care Levy, which was due to take effect on 6th April 2023 is now scrapped.
There are no changes to the Primary Threshold and Lower Profits Limit which were increased from £9,880 to £12,570 in July 2022. These are aligned with the personal allowance threshold.
Update 17 October 2022: No changes – this announcement remains.
Dividend rates
The government is reversing the 1.25% increase in dividend tax rates applying UK-wide from 6th April 2023.
Alongside the reversal of the Health and Social Care Levy, the ordinary and upper rates of dividend tax will be reduced to 2021-22 levels of 7.5% and 32.5% respectively.
Due to the abolition of the additional rate of income tax, income that was previously charged at the additional rate will now be charged at the upper rate of 32.5%.
The reduction of all rates by 1.25% will benefit 2.6 million taxpayers with an average benefit of £345 in 2023-24, and additional rate payers will further benefit from the abolition of the additional rate of dividend tax.
Update 17 October 2022: the reduction in dividends rates has been reversed, this means dividend tax rates will remain at: basic rate 8.75%, higher rate: 33.75% and additional rate 39.35%.
Corporation tax
The corporation tax rate will remain at 19%, irrespective of the profit levels. The chancellor scrapped the increase in corporation tax rates which was due to take place on 6th April 2023.
S.455 tax rate on directors’ overdrawn loan accounts will remain at 32.5%.
Update 17 October 2022: the announcement that corporation tax will remain at 19% has been reversed. From April 2023 the main rate of corporation tax will be 25% for Companies with profits of £250,000 or more. A small profits rate of 19% will exist for Companies with profits of £50,000 or less and any Companies with a profit of between £50,000 and £249,999 will pay a tapered rate of tax between 19-25%.
Stamp Duty Land Tax
SDLT thresholds for residential properties in the UK have increased from 23rd September 2022 as below:
Residential properties: 23 September 2022 onwards
Property value
UK Residents
Non-UK Residents
Only property
Additional property
Only property
Additional property
Up to £250,000
Nil
3%
2%
5%
Next portion from £250,001 to £925,000
5%
8%
7%
10%
Next portion from £925,001 to £1,500,000
10%
13%
12%
15%
Remaining amount above £1,500,000
12%
15%
14%
17%
From the 23rd of September 2022, first-time buyers will not pay SDLT up to a property value of £425,000, and 5% SDLT will be due on the portion from £425,001 to £625,000.
If the price is over £625,000, there is no relief available.
Update 17 October 2022: This remains, no changes.
Personal Investment allowances (EIS, VCT, SEIS, CSOP)
The Chancellor set out his determination to make this country an entrepreneurial, share-owning democracy.
He announced that the Enterprise Investment Scheme and the Venture Capital Trusts will be extended beyond 2025.
The limits for the Seed Enterprise Investment Scheme and Company Share Option Plans will be increased to make them more generous.
These schemes offer private investors generous tax benefits such as income tax relief, and exemption from capital gains tax and inheritance tax and they are a vital part of driving investment for new start-up companies.
Update 17 October 2022: This remains, no changes.
Off-payroll working (IR35) reforms repealed
From 6th April 2023, the recent reforming rules for the public sector (2017) and private sector (2021) are repealed.
From that date, workers providing their services via an intermediary will once again be responsible for determining their employment status and paying the appropriate amount of tax and National Insurance contributions.
This will free up time and money for businesses that engage contractors, the reform also minimises the risk that genuine self-employed workers are impacted by the underlying off-payroll rules.
Update 17 October 2022: IR35 tax rules for the self-employed which can result in them being tax as employees reinstated.
Annual Investment Allowance (AIA)
The Chancellor has announced that the £1 million level of AIA (which was due to end on 31st March 2023) has been made permanent.
This means businesses can deduct 100% of the costs of qualifying plants and machinery up to £1 million in the first year.
Update 17 October 2022: This remains, no changes.
Investment Zones
Businesses in designated areas in investment zones will benefit from 100% business rates relief on newly occupied and expanded premises.
Local authorities hosting Investment Zones will receive 100% of the business rates growth above an agreed baseline in designated sites for 25 years.
In addition, businesses will receive full stamp duty land tax relief on land bought for commercial or residential development and a zero rate for Employer National Insurance contributions on new employee earnings up to £50,270 per year.
To incentivise investment there will be a 100% first year enhanced capital allowance relief for plant and machinery used within designated sites and accelerated Enhanced Structures and Buildings Allowance relief of 20% per year.
Update 17 October 2022: Not clear whether this remains.
When you are self-employed, the amount of tax and national insurance you pay is based on your taxable business profits.
Profit is a term that describes all your income less all your business expenses. Therefore by reducing your profit, you are lowering the figure that your tax and national insurance are calculated upon.
Having allowable business expenses as someone who is self-employed is a perfectly legal way for you to pay less tax! But it is very important that you keep track of your income and expenditure, as well as keep copies of all your receipts and invoices.
It won’t be a surprise to learn that HMRC set out strict rules about which expenses you can claim for (allowable business expenses) and which expenses you cannot claim for (disallowable business expenses).
In this guide we aim to help you understand the do’s and don’ts of self-employed business costs and what may or may not be classed as allowable business expenses. Read on to find out more!
Self-employed expenses you can claim
Here is a list of the most common self employed expenses that you can claim.
Allowable vs disallowable self-employed expenses
Allowable
Disallowable
Wages & National insurance costs of employees (1)
HMRC fines & penalties
Freelancers & subcontractors (2)
Parking fines
Stock and raw materials (3)
Your wages/salary (1)
Home office costs (4)
Depreciation (14)
Rent, utilities & office maintenance (5)
Entertaining & gifts (15)
Printing, postage & stationary
Non-safety or uniform clothing (11)
Advertising & marketing
General food (7)
Subscriptions
Travel between your home and normal work place (7)
Training courses to improve existing skills (6)
Training for new skills, qualifications or expertise (6)
Business travel (7)
Hotels & meals
Mileage, taxis & trains
Personal expenses such as gym memberships, Spotify, Netflix etc.
Business vehicle (8)
Servicing
Insurance
Repairs
Fuel
Medical expenses (16)
Equipment & Tools (9)
Website, hosting & email
Telephone & Internet (10)
Uniforms & safety clothes (11)
Legal & accounting fees
Bad debts
Bank charges or payment system fees
Coaches & Consultants (12)
Pre-trade expenses (13)
What is an allowable self-employed expense?
The overarching rule that you should follow when it comes to allowable expenses, is that every expense you claim on your tax return must be wholly and necessarily incurred for business purposes only.
Claiming wrongly could result in investigations, penalties, interest and surprise tax bills.
Allowable expenses are costs that you can claim against your tax bill. Generally speaking, most of the things that you pay for as a direct result of being in business are allowable expenses because you wouldn’t incur them if you were not in business.
What is a disallowable expense?
There are certain expenses, that even though you may pay for as a result of being in business, cannot claimed against your taxes as a business cost.
Some of the expenditure in the table above requires a little more explanation and we have therefore included more detail below for specific expense categories.
Wages & National Insurance (1)
If you pay employees in your business, the cost of their salary or wage can be claimed against your profits, along with employer’s national insurance and pension contributions.
This does not apply to your own wages, i.e. the money you take from the business to live on, this is because as a self-employed person you are taxed on your profits before your salary or wage.
Freelancers & subcontractors (2)
You can claim the costs of any freelancers or subcontractors that you pay to support your business.
However, there are rules around whether an individual performing services is considered employed or self-employed for tax purposes, and we encourage you to review this for each freelancer or subcontractor.
HMRC have created a useful tool that allows you to answer questions based on how your business operates with that individual, in order to determine their employment status.
If you are a product based business you will incur costs for purchasing stock items, and you may also incur costs for items required to make your product.
For example if you are a clothing business you will need to buy the clothing item (stock) and then you may need to purchase some dye (raw materials) to create your bespoke clothing item that you then sell in your business.
Home office (4)
If you work from home then you may be eligible to claim for some of your home expenses.
The easiest way to claim your expense is to use a simplified flat-rate amount depending on the number of hours you work at home.
You can claim a flat-rate amount for working from home as an allowable business expense. This is provided you work from home at least 25 hours per month.
The working from home flat rates currently are:
£10 per month if you work between 25 and 50 hours per month;
£18 per month if you work between 51 and 100 hours per month;
£26 per month if you work 101 or more hours per month.
Simplified expenses do not cover the internet and mobile phones. Therefore, make sure you claim separately along with other business expenses, if appropriate.
The flat rate method means you don’t need to keep hold of any receipts.
This makes things a lot easier however, the downside is:
You can only claim the use of home as office allowance if you work at home for more than 25 hours per week;
You still need to make a separate claim for business use of your telephone and internet (for which you must keep receipts);
Whilst this is a super simple method of claiming, you should check whether claiming for actual costs is more beneficial to you.
Alternatively, you can claim an actual portion of your household bills, including your utility bills, mortgage interest (not the capital part) or rent based on the space you are using.
When working out you claim for using your home as an office, you’ll want to consider the following household bills in your calculation:
Heating
Electricity
Rent
Mortgage interest (not capital)
Insurance
Repairs
Cleaning
Council tax
Once you have all your actual costs, you’ll need to work out the portion to claim on your taxes.
Here are the steps you need to follow:
Count up the number of rooms in your house or apartment;
Divide the total costs of the bills by each room (either equally or by floor space);
Estimate how much time you spend working in each room across a week;
Divide that amount by 7 to get the daily usage;
Divide that answer by 24 and then multiply this with your answer from step 2 for the specific room.
A template calculation can be found in our self-employed spreadsheet.
Claiming for your home using actual expenses can be more tax-efficient for some – just make sure that you:
Keep your utility bills to support your claim should HMRC investigate;
Apportion the cost of bills according to the floor space of each room, rather than equally (as in step 2 in our example above) if it makes more sense;
Don’t dedicate a room in your home to your office space. Dual-use is essential, otherwise, you may risk being charged capital gains tax when you sell your home or getting a bill for business rates;
Check your mortgage, tenancy agreement or lease because there may be clauses preventing you from using your home as an office.
Whether you choose the flat-rate method or actual costs method to claim for your home office, don’t forget you’ll need to claim expenses for additional costs against your self-employed taxes such as:
Broadband
Mobile phone
Desk
Shelving and storage
Stationery
Rent, utilities & office maintenance (5)
If you choose to rent business premises, then you can claim:
Rent/lease payments,
Business and water rates,
Lighting,
Heating,
Property and contents insurance.
Training courses (6)
Training courses tend to fall into two categories:
Training courses to update and improve existing professional skills & qualifications
Training courses attended to learn new skills or gain new qualifications
However, if you attend training to learn new skills, this will most likely not be tax-deductible. This is because when you learn a new skill, these costs are considered capital in nature so cannot be expensed on your tax return. For example, a hairdresser that attends a course on how to become a makeup artist, this would be disallowable.
You must retain evidence to support your conclusion on the training course tax deductibility, as HMRC may wish to inspect it.
Business travel (7)
Claiming travel on your taxes can be a complex area.
In general, you can claim travel away from your normal place of work for things like:
Visiting clients or suppliers for new or existing business
Overnight business stays
Travel to training courses that qualify for allowable expenses
Travel outside your normal business commute is known as irregular travel.
For your business travel to be an allowable expense, each journey you undertake must be:
An irregular journey, outside your normal commute;
Fully business related and not contain any element of personal travel (also known as a dual purpose trip);
Not related to a regular contract/agreement with a client.
What is a dual Purpose Trip?
A dual-purpose trip is one that has a personal element to it. For example, where as part of a work trip you sight-see, take your family/friend, or even just stop for a spot of shopping. Consequently your whole trip could be deemed disallowable.
You should keep entirely separate receipts and expenses for the business side of your trip and book anything personal, family or friends related completely separate.
Travel to your normal place of work:
You cannot claim for travel to and from your normal place or places of work e.g. to your office, studio, or co-working space. It must only be travel to a temporary workplace.
A temporary workplace is defined by HMRC as one which you attend that:
For a limited time only, like a one-off meeting;
Meets the “40% rule” – that means a workplace where you spend less than 40% of your working time at;
Is for less than 24 months.
So watch out, if you regularly travel to the same place you may not be able to claim the travel expenses.
Travel costs for irregular journeys that meet the above criteria could include:
Mileage OR vehicle costs
Trains
Flights
Buses
Parking
Taxis
Hotels
Subsistence (food)
Taxis
Be aware that HMRC take a dim view of excessive use of taxis, particularly if they appear unnecessary – i.e. it was a very short journey.
Overnight stays
If your business travel includes an overnight stay, then you can claim the cost of this as part of your travel. You can also claim for food & drink that you had to pay for as part of your irregular journey.
You can claim for:
The cost of travel to the location;
Accommodation for your overnight stay;
A reasonable amount for an evening meal and breakfast
HMRC will likely question any excessive claims for expensive hotels or lavish over the top dinners. So, sorry, but staying at the fancy hotel and having fine dining is probably not going to be acceptable!
Mileage or business vehicle (8)
If you use your car for business purposes you will need to decide which is the most tax-efficient method for claiming relief. This will most likely depend on how much travel you do.
The main ways you can claim for using your car for business reasons are:
Claim business mileage at the rate set by HMRC;
Buy a car through your business and claim for the business use proportion
Mileage
The mileage rates set by HMRC are set at a rate per mile that contributes to the cost of wear and tear on a vehicle as well as fuel, MOT and servicing. Other car expenses are not tax deductibles such as MOT, repairs and fuel. Therefore you must pay tax on these.
Current rates:
45 pence per mile for cars and goods vehicles on the first 10,000 miles travelled (25 pence over 10,000 miles)
24 pence per mile for motorcycles
4p per mile for fully electric cars
You need to keep a record of all your business journeys, the key things to include are:
Date of the journey
Purpose of the journey e.g. to visit a client
Start location
End location
Number of miles
A template mileage log can be found in our self-employed spreadsheet.
To calculate the amount you can claim you apply the rates applicable to the number of miles. For example, if you travelled 11,000 miles for the business you would claim
First 10,000 at 45p per mile = £4,500 plus 1000 at 25p per mile = £250, therefore total claim £4,750.
Business vehicle
Buying a car through your business may be tax efficient depending on your line of work. However, the way you’ll get tax relief will depend on how you pay for the car and its CO2 emissions.
You are not able to claim for personal expenses, which means you will only ever be able to claim for the business proportion of the car. You need to make sure you can show evidence of how you use your car for business, should HMRC ever investigate.
The easiest method is to assign a % of business use to the vehicle e.g. 80% personal and 20% business.
As a self-employed sole trader, the way you’ll get tax relief on your car is by using Capital Allowances.
Capital allowances are a way of giving you tax relief on more expensive items, like cars, that you keep for a number of years.
You’ll have to claim for a portion of the car cost, depending on its emissions, using Capital Allowances:
up to 50 g/km – 100% first-year allowance
51g/km-110g/km – 18% capital allowances
111g/km or more – 8% capital allowances
If you choose to use this method for your new car, then you can also claim for the business proportion of fuel, servicing, insurance and repairs on your vehicle as tax-deductible expenses.
For example, you buy a car for £10,000 and use it for 70% for business. The car has emissions of less than 50 g/km. You can expense the full business amount of the car – £7,000 (£10,000 x 70%) against your taxes in the tax year you buy it.
If the same car had emissions of 120 g/km then you’ll work out the amount you claim as an allowable business expense differently.
Tax Year 1
Cost of car £10,000
Claim 8% £800 ( business use claim on your tax return is £560)
Cost c/fwd £9,200
Tax Year 2
Cost of b/fwd £9,200
Claim 8% £736 ( business use claim on your tax return is £589)
Cost c/fwd £8,464
You’ll then need to keep going year on year until you either sell the car (and need to make a balancing adjustment), or you have claimed for the full amount of the car against your taxes – whichever comes first.
Depending on which car you have in mind the amount you can claim will vary.
We would take care of calculating the capital allowances etc. for you as part of doing your tax return, but if you choose this method for claiming car costs it’s best to have a chat with us beforehand.
Equipment, tools & other assets (9)
You may need to buy items such as:
Laptops
Headphones
Tech items
Office furniture
Tools
Equipment
Vans
Cars
Provided they are used for the business you will likely get tax relief for the items. Though depending on the type of purchase, it may be that the way you claim is through capital allowances as opposed to just normal expenditure.
Capital allowances
Capital allowances are a type of tax relief that businesses can claim when they invest in long-term assets. Sometimes known as fixed assets (or capital assets), these are assets which you can reasonably expect to stay in use by the business for longer than 12 months.
Claiming capital allowances means you can deduct part or all of the asset’s value from your profits.
There are different types of capital allowances, with different criteria. In some cases, claiming them means a business can write off the entire cost of buying an asset in one year, making a significant dent in its tax bill.
There are three main categories of capital allowances, which you must use depending on the type of assets you have bought. These three categories exclude cars, which are treated slightly differently.
Here’s how much businesses can claim as a percentage of the cost of the capital asset they have purchased on each tax return:
Main Rate Pool – 18%
This pool includes things like plant & machinery, equipment and furniture.
Special Rate Pool – 8%
This is a unique category and refers to purchases which are:
parts of a building considered integral – known as ‘integral features’;
items with a long life of over 25 years;
thermal insulation of buildings;
cars with CO2 emissions of more than 130g/km.
Single Asset Pool – 18% or 8%
A business can create a single asset pool where an asset has a really short life, but you cannot include in this pool any cars, special rate items (number 2 above) or anything that you use for non-business reasons.
Businesses claim for HMRC capital allowances on cars based on CO2 emissions of the vehicle and whether it is new or second-hand. Refer to business vehicle above for more details.
Annual Investment Allowance
Certain assets purchased to qualify for the annual investment allowance which allows for the cost of the asset to be fully deducted in the year of purchase rather than over the life of the asset.
The Annual Investment Allowance (AIA) is a tax break created by HMRC to encourage spending by businesses. It permits businesses to deduct the full value of certain ‘qualifying assets‘ against their profits before tax in the year they make the purchase, up to a certain limit (currently £1m).
Capital allowances can be complex and we will prepare the required calculations as part of completing your tax return.
Telephone & internet (10)
If you use your mobile and home internet for your business then you can claim a proportion of these costs on your tax return. For example, if your mobile costs £50 per month and you use it 50% for business, you could claim £25 per month as a tax-deductible expense.
Uniform & safety clothing (11)
You can claim the costs of branded uniforms that you have for your business. For example, if you get t-shirts or jumpers with your logo printed on them. However, you cannot claim non-branded uniforms unless they are for safety reasons, for example, steel toe cap boots etc.
Dual-use clothing, like business suits, workout gear, general outfits etc. are not an allowable expense.
The general rule is if you could include anything you wear for work as part of your ‘everyday wardrobe’, even if you choose not to wear them outside of work, these items cannot be claimed as expenses.
That applies even if you have to wear a suit or certain type of clothing to work, you cannot claim the cost of these outfits against your taxes.
Coaches & Consultants (12)
You can claim the cost of a coach or consultant provided the coach or consultant is providing services only related to your business.
For example you might work with a marketing consultant to increase your brand awareness and customer enquiries or similarly you might work with a business coach on streamlining your operational functions or financial position. These would be examples of allowable expenditure.
Be careful though, as life coaching or more general coaching would be considered be not allowable for tax purposes.
Pre-trading expenses (13)
Pre-trade expenses are costs you incur before you start trading. You can usually treat these as if the expenses were incurred on the first day you began trading, so they will be an allowable business expense in your first set of accounts.
The relief is only available if:
It was incurred in the period 7 years before the commencement of trade
If it would be allowable if incurred after trading commenced (e.g. entertaining would not be allowed as a pre-trading expense)
Depreciation (14)
Fixed assets, over time, begin to lose value and this decrease in value needs to be reflected in the accounts using depreciation.
Depreciation is the write-off of fixed assets over a set period to reflect the use and eventual depletion in the value of the asset.
We will calculate depreciation when completing your tax return, however, this is not an allowable expense for taxes, instead, relief is gained for the reducing value of the assets through capital allowances.
Contact us at The Orenda Collective today, so we can help you with this.
Entertaining (15)
HMRC classes entertainment as “business entertainment”, when it is provided free of charge to people (customers, suppliers, subcontractors etc.) who are not employees of your business.
It defines entertainment as “hospitality of any kind” and gives examples including:
food and drink
accommodation (e.g. hotels)
theatre and concert tickets
entry to sporting events and facilities
entry to clubs and nightclubs
Gifts
use of capital assets
when you provide entertainment or hospitality only for the directors or partners of your business
Entertainment does not qualify for any tax relief.
Medical expenses (physio, chiropractor, massages, doctors fees etc) (16)
Unfortunately, you can’t claim for any medical related expenses such as physio, chiropractor, massages, doctors fees etc. This applies even if the symptoms you are addressing through the medical expenses were caused by your trade, or are you stopping you from completing your trade.
When you are registered for UK VAT and you receive an invoice or receipt that shows VAT on it you automatically assume that you can reclaim that VAT. However, sadly that is not always the case.
You are only able to reclaim the VAT on your UK VAT return if the VAT is charged by a UK supplier with a UK VAT number.
What happens when you are charged VAT from an EU supplier or overseas supplier?
As noted above you can’t claim the VAT that you have been charged on EU or overseas suppliers back in your UK VAT return, this applies even though you can see the VAT%, the VAT amount of the VAT number on your invoice.
The invoice will likely look very similar to any other UK supplier invoice but the supplier is outside of the UK so you can’t process them the same way.
What should I do instead?
Instead, you need to set your account up with the supplier so that you don’t get charged VAT in the first place…
If you provide your VAT number to an EU or overseas supplier then they will zero rate your VAT and charge you 0% VAT.
You can usually log into your online and account and check the settings to ensure that the account is in your business name and that your UK VAT number is provided.
Which suppliers does this commonly impact for our clients?
Google Adwords– Based in Dublin in the Republic of Ireland. If your account is set up properly with a UK VAT number included then they will charge you 0% VAT and their charges will be subject to reverse charge VAT. You can tell google your VAT status here.
Facebook– Also based in Dublin and will be zero-rated subject to the reverse charge. You can tell Facebook that you are a UK VAT registered business here by selecting add information to your invoice.
Hootsuite– Based in Canada, but they are registered for VAT in the EU, so also zero-rated subject to the reverse charge. You can tell Hootsuite that you are a UK VAT registered businesshere.
GoDaddy– Based in America, but they are registered for VAT in the EU, so zero rated and subject to the reverse charge. You can tell GoDaddy that you are a VAT-registered business by following these steps.
Mail Chimp – Based in America, but they are registered for VAT in the EU, so zero rated and subject to the reverse charge. You can tell Mailchimp that you are a VAT registered business by following these steps.
We will keep adding new suppliers and instructions as we identify them.
What is the reverse charge?
You must account for VAT in your business accounts under the reverse charge VAT mechanism where applicable.
The reverse charge is the amount of VAT you would have paid on that service if you had bought it in the UK.
Where it applies, you act as if you are both the supplier and the customer. You charge yourself the VAT and then you also claim it back. So the two taxes net each other out. Feels a bit pointless I know… but HMRC wants to measure the amount of tax under the reverse charge which is why we have to report it as part of our taxable sales.
Most accounting systems such as Xero have a VAT code for EC Reverse Charge that will take care of the entries on your VAT return for you when you select it.
As a business owner you may be looking at ways to extract funds from your business. Company cars used to be a common method of doing that but over recent years the tax charged has made them unattractive.
But that is changing if you are happy to have an electric car.
What is a company car, how do they work?
A company car is one owned by a business and provided to an employee for their use.
It is expected that any vehicle given to an employee will have personal use and therefore there is a tax charge.
Income tax for the individual and National Insurance for the company.
How is the tax on a company car worked out?
The tax charge (benefit in kind that is declared on a P11d form) is based on the CO2 emissions and the cost price of the car.
What is the benefit-in-kind (BIK) for electric cars?
As when purchasing any car through a company, as soon as the vehicle is used for personal travel, a BIK will arise. Unlike petrol and diesel cars however, electric cars have a much lower BIK tax rate.
For the 2024/25 tax year (and 2023/24), the BIK rate for all zero-emission vehicles is 2%. This rose from 1% in the 2021/22 tax year, but there are still significant savings to be made when compared to petrol or diesel cars, which can attract a BIK rate of up to 37% depending on their emissions.
Tax on BIKs must be paid by both the company and the employee, therefore be aware that if you are a sole director of your own limited company, you will have tax to pay from your company as well as from through your personal tax return.
To calculate how much tax the company will pay for providing an electric car to an employee as a BIK, you will need to use the formula:
P11D value (the value of the electric car) x BIK rate based on CO2 (2% as set out by the government in 2024/25 tax year) x 13.8% (the rate of Class 1A National Insurance contribution payable by employers).
Using an example of a Tesla worth £60,000, the company would calculate 2% of this value (£1,200) and multiply it by 13.8%. The company would pay £165.60 in tax every year the car is available as a BIK to the employee.
Individual Tax
To calculate how much tax the employee will need pay as a result of receiving an electric car as a BIK will be dependent again on the P11d value, the BIK rate and the employee’s personal income tax band. You would use the formula:
P11D value (the value of the electric car) x BIK rate based on CO2 (2% as set out by the government for 2024/25) x employee’s income tax rate
Using the same example of a Tesla worth £60,000 the employee would pay the following tax depending on their income tax band:
Basic rate taxpayer at 20% would pay £240 in tax each year
Higher rate taxpayer at 40% would pay £480 in tax each year
Additional rate taxpayer at 45% would pay £540 in tax each year
Should I buy, lease, hire purchase, PCP, etc.?
This is not a decision we feel should be principally driven by the tax treatment. Instead, we recommend putting tax to one side for a moment and considering which option makes most sense from a purely commercial basis:
Are you going to want to own the car in, say, five years’ time or would you be looking to upgrade?
How much more would you pay, in total, under a hire purchase deal as compared with PCP?
What about if you add in the PCP balloon payment?
How reliable do you think the car is and how much of a disaster would it be were it to require expensive repairs?
Who would be on the hook for those repair costs?
Once you have determined the most sensible approach from a commercial perspective, you can find the tax treatment below:
Purchase
You would get relief by means of capital allowances. So, for a £50,000 car your limited company would get corporation tax relief of £9,500 if it was a small company for corporation tax purposes (£50,000 Purchase Price x 100% First Year Allowance x 19% Corporation Tax Rate) and £12,500 if it was a main rate company for corporation tax purposes (£50,000 x 100% x 25%).
Note if your company is a marginal rate company i.e. profits between £50,000 and £250,000 then the exact amount you will get for corporation tax relief depends on your marginal rate of tax.
From 1 April 2021, pure zero-emission cars can qualify for 100% first year allowance if the car is purchased new and unused. This means that the entire cost of the electric car is deductible from profits before tax (with no caps limiting the value of the vehicle to be eligible for this allowance). The first year allowance is another type of capital allowance and is generally applicable to plant and machinery, as well as energy-saving equipment. Commercial vehicles already qualified for 100% relief under AIA.
Hire Purchase
Again relief would be through capital allowances, same as for an upfront purchase. To the extent interest is charged, this is a deductible business expense.
Operating Lease
The monthly lease fees are deductible business expenses. So, say the monthly cost is £1,000. You claim £12,000 a year as a deduction in your corporation tax return and save £2,280 in tax if your are a small profits company for corporation tax (£12,000 expense x 19% Corporation Tax Rate) or £3,000 if you are a main rate company (£12,000 x 25%).
Note if your company is a marginal rate company i.e. profits between £50,000 and £250,000 then the exact amount you will get for corporation tax relief depends on your marginal rate of tax.
Finance Lease
The asset is, “depreciated” over its economic life in the accounts. The depreciation and any interest are deductible expenses. Say the car cost £50,000 and the useful economic life is determined to be 8 years. You can deduct 1/8th the cost each year, so £6,250, saving £1,187.50 in tax if your are a small rate company (£6,250 depreciation x 19% Corporation Tax Rate) and £1,562.50 if you are a main rate company (£6,250 x 25%).
Note if your company is a marginal rate company i.e. profits between £50,000 and £250,000 then the exact amount you will get for corporation tax relief depends on your marginal rate of tax.
What’s the difference between an operating lease and a finance lease?
An operating lease is a typical, bog standard lease agreement. You get the use of a car, you pay a fee and in 5 years you hand the car back in.
A finance lease arises where the lease, “transfers substantially all the risks and rewards incidental to ownership.” This might exist where, for example:
The lease is fairly long,
If you add up the total payments it’s very close to buying the car,
You’re on the hook for repairs, insurance, and any other costs,
You have the option to buy at the end of the contract for a small fee
Depending on how they’re drafted, PCP contracts can sometimes fall within the definition of a finance lease.
Can you claim back VAT on electric cars?
The usual rules apply when it comes to claiming back VAT payments on cars purchased through a company, regardless of whether it is electric or fuel-run. The only time you can claim back VAT is when the car is solely being used for business purposes and has no personal usage. HMRC are often sceptical of this claim, so ensure that you have sufficient evidence if this is the case.
In comparison, were you to lease and not purchase an electric car instead through your company, you would be able to reclaim 50% of the VAT from the lease payments, even where there is some personal use. Where the leased electric car is exclusively used for business, 100% of the VAT can be reclaimed.
If you have purchased an electric van or motorcycle through your company that is solely for business purposes then 100% of the VAT can be recovered. If there is any significant personal use then you will need to adjust for a proportionate amount of VAT to be claimed.
Bottom line though, why not just buy an electric car myself?”
Let’s take an example:
Beth is a marketing agency who operates through a limited company that is small rate for corporation tax purposes. She’s considering buying an electric car, mostly for private use. She plans to spend £50,000 on the car and is a higher rate taxpayer.
Option 1: Beth has her company declare a £50,000 dividend which she uses to buy the car. She pays tax at 33.75% on the dividend. That costs her at least £16,875 in income tax.
Option 2: Beth has her limited company buy the car. There is no dividend tax to pay so he’s saved £16,875 right off the bat. She can also claim capital allowances which save her £9,500 in corporation tax. Income tax on the benefit will be just £400 for 2024/25 and the company benefit cost is £150.05. So, all in, Beth is £25,924.95 better off buying in the company than buying herself – more than half the value of the car.
Please note this is an example and the savings depend on the value of the car, the rate at which the individual pays tax, whether it qualifies for capital allowances and the benefit percentages are subject to HMRC change.
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.
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?
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.
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:
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.
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.
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.
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:
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.
business assets that are transferred to you as a going concern
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.
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?
Expected income and profits of the business
Your other earnings and personal tax position
The level of personal risk or financial liability you are comfortable taking
Brand perception and customer preferences
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:
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.
A photographer that purchased their own photography equipment, schedules their own shoots and has multiple clients they take photos for.
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:
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.
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.
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.
If you’re self-employed or run a small business, one of the biggest financial worries can be setting aside enough for your tax bill. No one wants a nasty surprise when the payment deadline rolls around!
So, how much should you actually save? In this guide, we’ll break it down step by step to help you plan ahead with confidence.
Why Do You Need to Save for Tax?
Unlike employees, who have tax deducted automatically through PAYE, self-employed individuals must calculate and pay their own tax and National Insurance Contributions (NICs).
HMRC expects you to make two tax payments each year:
Self Assessment Tax Bill (due by 31st January following the end of the tax year)
Payments on Account (advance payments towards next year’s tax bill, due 31st January and 31st July)
To avoid any last-minute panic, it’s important to save as you go.
How Much Should You Set Aside?
The exact amount depends on your taxable profit (income minus allowable expenses). Here’s a simple way to estimate how much to save:
Step 1 – Estimate your taxable profit for the year
Once you have this figure, you can calculate how much tax and NICs you’ll owe.
TIP: If you use Xero, you can run the profit and loss report to show you for profit for the period.
Step 2 – Determine your tax band based on your taxable profit estimate
There are different rates depending on which tax band you fall in, so it is key that you get this bit right.
Where you see the * within the higher rate threshold it is really important to highlight that when your taxable profits are between £100,000 and £125,140 you start to lose your tax free allowance. For every £2 that your profits are are over £100,000 you lose £1 of your tax free allowance. This means that when your profits are £125,140 or more you receive no tax free allowance at all, effectively making the tax you pay on amounts earned between £100,000 and £125,140 60% – we refer to this as the tax trap. If your profits are in excess of £100,000 we strongly recommend you get in contact with us to discuss ways of avoiding the tax trap and how to accurately estimate your tax bill.
Estimated Profit
Tax band
Rate
£0 and £12,570
Tax free allowance
0%
£12,570 and £50,270
Basic rate tax
20%
£50,270 and £125,140
Higher rate tax *
40%
£125,141 +
Additional Rate
45%
Step 3 – Calculate your income tax estimate
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 £12,570 and £50,270
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:
Profit (£35,000) – personal allowance (12,570) = £22,430
£22,340 x 20% = £4,486
Total tax to pay £4,486
Your profit falls between £50,270 and £100,000
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:
Profit (£75,000) – basic rate band (£50,270) = £24,730
£24,730 x 40% = £9,892
£50,270 – personal allowance (£12,570) = £37,700
£37,700 x 20% = £7,540
Total tax to pay = £9,892 + £7,540 = £17,432
Step 4 – Calculate your national insurance estimate
Self-employed individuals pay Class 2 and Class 4 national insurance (“NI”).
Class 2 NI
If your profit is above £6,725 you do not need to pay class 2 NI contributions, it is deemed as having been paid.
If your profits are less than £6,725 you can chose to voluntarily pay class 2 NI of £3.50 per week or £182 per year (2025/26), you may chose to do this to ensure you are entitled to benefits such as state pension.
Class 4 NI
Profit
NI rate
Up to £12,570
NIL
£12,570 and £50,270
6%
Over £50,270
2%
So, using the same examples as above:
Your profit falls between £12,570 and £50,270
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
NIL as your profit is in excess of £6,725.
Class 4 NI
Profit (£35,000) – NI lower profits limit (£12,570) = £22,430
£22,430 x 6% = £1,345.80
You will pay £1,345.80 of class 4 NI
Your profit falls between £50,270 and £100,000
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
NIL as your profit is in excess of £6,725.
Class 4 NI
£75,000 – NI upper profits limit (£50,270) = £24,730
£24,730 x 2% = £494.60
NI upper profits limit (£50,270) – NI lower profits limit (£12,570) = £37,700
£37,700 x 6% = £2,262
£2,262 + £494.60 = £2,756.60
You will pay £2,756.60 of class 4 NI
Step 5 – Total tax bill estimate
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.
Example for £35,000 of self-employed profits
Tax = £4,486
Class 2 NI = £NIL
Class 4 NI = £1,345.80
Total = £5,831.80
Example for £75,000 of self-employed profits
Tax = £17,432
Class 2 NI = £NIL
Class 4 NI = £2,756.60
Total = £20,188.60
How much tax to save as a percentage based on different profit levels
If you found the above a little too complicated and just want a set percentage to put aside on all your profits we’ve created a table for the 2025/26 tax year so you can get started straight away. Please note, if you are between profit thresholds its always best to save based on the higher percentage to be safe.
Best Practices for Tax Saving
Have a different bank account for your self-employed business to keep personal and business transactions separate – this one is really game changing when it comes to preparing your tax return.
Open a separate savings account just for tax – or if your bank offers ‘pots’ or ‘spaces’ utilise these to keep money you can spend and money you are saving for tax apart.
Save a percentage of every payment you receive to avoid under saving – you can automate this on banks such as Monzo. If you are saving as a percentage of sales as opposed to profit the actual percentage will be less than those quoted above, but to be prudent it never hurts to save more.
Use accounting software like Xero to track earnings and tax estimates.
Don’t Forget VAT
If your business turnover exceeds £90,000 in a 12 month rolling period, you must register for VAT. This means you may need to set aside an additional amount to cover VAT liabilities. To understand more about VAT read our guide here.
Need Help with Your Tax Planning?
Estimating and saving for tax can feel overwhelming, but you don’t have to do it alone. At Orenda Collective, we help freelancers and business owners take control of their finances with clarity and confidence.
The information in this blog is for general guidance only and does not constitute accounting, tax, or business advice. Every business is unique, and we recommend seeking personalised advice before making any financial or strategic decisions. If you need tailored support, feel free to contact us.
This is for tax year 2025/2026 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 help.
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 the examples. Feel free to reach out to us if you need help here.
