This guide will show you how to create a government gateway account in the simplest way and link it to all your relevant taxes.
Creating a government gateway account will allow you to manage all of your taxes and their associated details effectively.
We have split this guide into two sections:
Section 1: Creating your government gateway account – which should only be done once per business/individual Section 2: Adding taxes to your government gateway account – which will need to be done a number of times depending on how many taxes you or your business is registered for.
TIP: You do not need to add taxes that you are not registered for. For example if you are not a company you would not need to add corporation tax, if you are not VAT registered you would not need to add VAT etc.
Section 1: Creating a government gateway account
Go to HMRC’s log in page
Click the green ‘sign in’ button
Click ‘Create sign in details’
Enter your email address when asked
You will now be emailed a confirmation code, use this code to confirm your email address
Once your email is verified you will be asked for your full name and to create a password
You will now be issued with a user ID for your government gateway account – see TIP.
You will then be asked to select what type of account you need, it will either be ‘individual’ if you are self-employed or ‘organisation’ if you are a limited company (you can add your self-assessment for directors to the same account if you are a company so there is no need for two government gateway accounts)
You will then be asked to add an additional security step
TIP: Print this page to PDF and save it somewhere safe in your documents. Losing this ID can create a lot more trouble for you in the future.
You have now created your government gateway account.
Section 2: Adding taxes to your government gateway account
Now that you have set up your government gateway account, you will need to add each tax that is relevant to you.
These taxes could include:
Corporation tax (companies)
PAYE for Employers (if your business operates a payroll)
VAT (if your business is VAT registered)
Self-assessment (for self-employed people or limited company directors)
To add a service, you will need to do the following:
From the business tax summary page, click ‘manage account’
Then select ‘Get online access to a tax, duty or scheme’
Select the tax you want to add and click the green button
Each specific tax will require specific information relating to that tax
• Corporation tax – Company UTR
• PAYE for Employers – PAYE reference and accounts office reference
• VAT – VAT number
• Self-assessment – Personal UTR
If you are a client of The Orenda Collective, you can access all this information from the portal.
After you have added the tax, HMRC will then post an activation code to your registered address
Once the code arrives, log back in, and input the code
You will now be set up for the relevant tax on your government gateway account.
When you operate a limited company, the amount of corporation tax your company pays is based on the profits chargeable to corporation tax.
Profit means company income less company expenses.
Therefore by reducing your company profit, you are lowering the amount that the company corporation tax is calculated upon.
Allowable expenses are a perfectly legal way you can pay less tax! But it is very important that you keep track of your limited company income and expenditure, as well as keeping copies of all your receipts and invoices.
It won’t be a surprise that HMRC set out strict rules about which expenses you can claim for (allowable expenses) and which expenses you cannot claim for (disallowable expenses).
Is there a general rule when it comes to limited company expenses?
The overarching rule that you should follow is that every expense you claim on your tax return must be wholly, exclusively and necessarily incurred for business purposes.
However, HMRC rules can be complex, and are often based on concepts such as ‘fairness’ and ‘reasonableness’ of expenses claimed.
In this guide, we’ll be going through all the main types of HMRC approved business expenses you can claim as a limited company for tax purposes.
Allowable business expenses reduce the amount of profit on which limited companies pay corporation tax. So, more allowable expenses means less taxable profit and less tax to pay.
But as always, you want to keep on HMRC’s good side, so you need to make sure you only claim for expenses that are on HMRC’s approved list.
Failing to do so can result in investigations, penalties, and interest.
To account for your expenses properly, you need to keep accurate records of your income and expenditure, do bear in mind that you’re legally bound to keep these records for at least six years.
Maintaining a limited company bank account
It is a requirement that Limited companies have a bank account set up in the Limited company name (as opposed to your personal name).
Where possible we recommended that all company transactions are paid into and out of this bank account for the best record keeping practices.
Company Invoices & Expenses
You should ensure that invoices, bills, receipts etc. are made out to/in the Limited company name as opposed to your own name.
In the event that either you as director or one of your employees has to pay for business expenses personally you should ensure that the receipts/bills are obtained and kept on record and that an expense claim is completed to reimburse you or the employee for the expenditure.
What is an allowable expense?
Allowable expenses are costs that you can claim against the company profits and therefore tax bill.
Generally speaking, most of the things that you pay for as a direct result of being in business are an allowable expense 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, you cannot claim against your taxes.
Allowable vs Disallowable expenses for limited companies
Allowable
Disallowable
Wages & National insurance costs of employees & Directors (1)
HMRC fines & penalties
Freelancers & subcontractors (2)
Parking fines
Pension costs (3)
Dividends (1)
Stock and raw materials (4)
Depreciation (20)
Home office costs (5)
Entertaining & gifts (21)
Rent, utilities & office maintenance (6)
Non-safety or non-uniform clothing (12)
Printing, postage & stationary
General food (8)
Advertising & marketing
Travel between your home and normal work place (8)
Subscriptions
Personal expenses such as gym memberships,Spotify, Netflix etc.
Training courses (7)
Personal accounting fees e.g. for a self-assessment tax return
Business travel (8)
Hotels & meals
Mileage, taxis & trains
Business vehicle (if vehicle legally owned by the company) (9)
Equipment & Tools (10)
Website, hosting & email
Telephone & Internet (11)
Uniforms & safety clothes (12)
Legal & accounting fees relating to the company only
Bad debts
Bank credit card and other financial charges (13)
Coaches & Consultants (14)
Charitable donations (15)
Christmas Party & staff events (16)
Gifts and trivial benefits (17)
Pre-trade expenses (18)
Medical costs (19)
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 or directors in your business, the cost of their salary or wage can be claimed against your profits, along with employers national insurance and pension contributions.
Depending on your personal circumstances we are likely to advise you to operate a payroll even if you are the only employee of the business.
This is because generally the most tax efficient way to extract money from a limited company as a director and shareholder is through a combination of low salary and dividends.
The salary is set at a suitably low threshold that avoids you having to pay income tax personally on the amount, but also entitles you to benefits such as entitlement to statutory maternity pay, a state pensionable year and corporation tax relief on the salary cost.
The optimum salary threshold is usually not enough to live on, and therefore the rest of the funds you need for personal use is extracted as a dividend.
It is important to note that dividends are not tax deductible when computing company profits.
So for example, if your company had £50,000 of income, £10,000 of overheads, you were paid and £11,000 salary and dividends of £5,000, your company taxable profits would be £29,000 and not £24,000.
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, 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 that may be useful.
Once your company has set up a contract with a pension provider it can make payments into your pension and receive 100% tax relief as an allowable business expense.
In the 2023/24 tax year, there’s a limit of £60,000 (2022/23: £40,000) on how much you can contribute free of tax to a pension scheme either through your company or personally.
Please speak to your financial advisor and us for more information so we can advise in more detail on this matter.
Stock and Raw Materials (4)
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 (5)
If you work from home then you may be eligible to claim for some of your home expenses.
HMRC allow for £6 per week or £26 monthly to be paid to employees of the business to cover their additional working from home costs.
Rent, utilities & office maintenance (6)
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 (7)
Where a Limited Company provides training to employees or directors corporation tax relief via an allowable expense is generally available.
This is provided the training expenditure meets the basic requirement of being incurred wholly, exclusively and necessarily for the purposes of trade.
In most cases the company will be providing the training to enable the employee or director to better perform their duties or role and to advance the companies trade, and therefore it is treated as an allowable expense.
Examples of this could be, a marketing course, further training on your skill or expertise and sales training.
Be careful though if the training cost is not work related as this may not attract corporation tax relief and can create an employee benefit that is required to be reported on a P11d form.
Business Travel (8)
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 be only travel to a temporary work place.
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 that 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 (9)
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 and what car you have.
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 company (i.e. the company owns the car) and claim for the car running costs
Mileage
The mileage rates set by HMRC is 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.
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 company bookkeeping 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 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 company 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 will also needed to consider the added tax implications that arise if the car also has personal use.
This is because using the car personally creates a P11d benefit, and both the company and you have to pay tax each year, on the deemed benefit of personal use.
Generally speaking, it’s not usually tax efficient to put a car, that you will use personally through the company in this way, unless it’s an electric car.
This is because normal cars attract a higher rate of P11d tax, which results in the tax savings of owning the car in the company, being wiped out.
Equipment, tools & other assets (10)
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 which 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;
Single Asset Pool – 18% or 8%
A business can create a single asset pool where an asset that 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.
Business 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 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 (11)
For mobile phones, provided the contract is between the company and the mobile phone provider, the company can claim all costs as an allowable expense.
If you make a claim for business only calls made on your personal mobile or landline phone bill, this is an allowable expense provided you can prove it was a business call.
It’s increasingly difficult to separate the cost of business calls, given the way mobile (and many landline) operators package call costs (e.g. ‘up to 2,000 free monthly minutes’).
If you can’t separate the business element from your personal use of your mobile phone, you cannot make a claim, due to the duality of purpose rules, as any business calls you make incur no extra cost on top of the tariff you already pay for personal calls.
If you start to carry out some of your work from home, using your residential broadband, you cannot make a claim if the broadband was already in place, unless you can clearly split the business from the personal element. Having two broadband lines could show one line is 100% for business.
If you have no broadband contract at home and need internet access to carry out your business, the costs can be reclaimed from your company, and no ‘benefit in kind’ charge arises.
However, it’s worth remembering HMRC are likely to challenge the fact that you have no broadband at home given how reliant on the internet we are.
Uniform & safety clothing (12)
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 it.
However, you cannot claim non-branded uniforms unless they are for safety reasons, for example, steal 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.
Bank, credit card and other financial charges (13)
Many types of bank charges can be claimed as an allowable business expense, though they must be for accounts or cards in the name of the business.
You can claim business costs for:
bank, overdraft and credit card charges the interest on business and bank loans (but not repayments of the capital or loan amount)
hire purchase interest
leasing payments
You cannot claim for repayments of personal loans, overdrafts or finance arrangements.
Coaches & consultants (14)
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.
Charitable donations as a limited company (15)
Your limited company pays less Corporation Tax when it gives the following to a UK registered charity:
Money
Equipment or trading stock (items your company makes or sells)
Land / property / shares in another company (shares in your own company don’t qualify)
Employees (on secondment)
Sponsorship payments
Christmas party and staff event expenses through your limited company (16)
Your company can host an annual event – most commonly a Christmas party – as a tax-free benefit, providing you meet certain conditions.
Your employees may invite a partner but you must not exceed an expenditure of £150 per head (including VAT). The event must cater mostly for staff. For example, expenses for one director and a plus one would be acceptable and would give you a budget of £300.
However, if those attending are not mostly employees then it would be difficult to argue the event’s main purpose is to entertain staff.
Note that the £150 amount is an annual limit and can cover multiple events for staff.
Be careful though, if the £150 annual limit is breached the whole event cost becomes a taxable employee benefit and must be declared on a P11d form and the appropriate taxes paid.
Gifts and trivial benefits from your limited company (17)
You don’t have to pay tax on a gift or benefit for your employee or director if all of the following apply:
it cost you £50 or less to provide
it isn’t cash or a cash voucher
it isn’t a reward for their work or performance
It isn’t in the terms of their contract.
This is known as a ‘trivial benefit’. Please note for directors, the amount cannot exceed £300 annually e.g. 6 x £50 = £300.
Assuming all the above criteria are met you don’t need to pay tax or National Insurance through P11d benefits or let HMRC know.
You would have to pay tax via a P11d form on any gifts or benefits that don’t meet all these criteria, so be careful not exceed these limits.
Pre-trading expenses (18)
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 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)
Medical expenses (physio, chiropractor, massages, doctors’ fees etc) (19)
Medical benefits provided to employees is an allowable expense in the Limited Company. However, the provision of medical (and all other benefits) are subject to employee benefit in kind tax.
The employee must pay personal tax on it and your company will be liable to National Insurance Contributions at 13.8%.
This generally means for directors, that its more tax efficient to pay for the medical expenses personally as opposed to through the company.
Depreciation (20)
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 of time 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.
Entertaining (21)
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.
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.
There are many reasons why you may want to go freelance. It might be that you are fed up of working for someone else, you would love to be your own boss or you want to choose your own hours and work from home. Whatever the reason, we have put together a guide to talk you through the steps on how to become a marketing professional.
How to become a marketing professional:
Choose your business structure
Register your business
Get a business bank account
Get appropriate insurance
Understanding record keeping requirements
Understanding accounting and tax requirements
In this guide we walk through each of these steps in detail to give you the confidence and knowledge required to become a marketing professional.
Choose your business structure for your marketing business
You have decided you want to become a marketing professional, but don’t know where to start. There are multiple options when deciding what structure is for you, the most common structures include:
Other such as; Joint ventures, charities and community interest companies
For the purposes of becoming a marketing professional there are two structures that we will focus on; Self-employed and Limited Companies. For further detail on other business types, please get in touch.
Do you need an accountant which specialises in Marketing Professional?
So, what is the difference between being a sole trader and a limited company?
To put it simply, being a self-employed/sole trader means you are trading as an individual, while being a limited company means you are trading as a company, albeit a company of one.
Self-employed/Sole Trader
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 marketing work themselves and take responsibility for the success or failure of their marketing work. As a marketing professional this would mean you would have to go out and find clients yourself.
Benefits of a marketing professional being self-employed
Simple freelance business structure without the administration burden of a Limited Company
Free and easy registration of your business with HMRC
Flexible freelance business structure that can later transition to a Limited Company
Considerations of a marketing professional being self-employed
You are personally responsible for any losses the freelance business makes
You are taxed at income tax rates which can be less tax efficient than operating as a Limited Company
Potential Clients may see sole traders as less attractive that Limited Companies
What is required of you as a self-employed individual
Register with HMRC at gov.uk
Record keeping of all income and expenses
Submit a tax return each year
Limited Company
Many of the indicators of a self-employed individual also apply to owners of a limited company, however, instead of being self-employed you are considered both an owner (shareholder) and office holder (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 as a marketing professional.
Benefits of a marketing professional operating as a Limited Company
Retain more of profits by utilising tax efficiencies
Limited personal liability, this means that if a Company is in debt, the personal assets and finances of the shareholders will be protected by law
Limited companies have a certain level of prestige in terms of brand image that sole traders do not
Considerations for a marketing professional operating as a Limited Company
More complex and expensive to set up than a sole trader
Limited company accounts and tax are more technical than a sole trader
There are additional costs incurred when operating a limited company
What is required if you register as a Limited Company
Incorporate your company with Companies house and register for company tax with HMRC
Record keeping of income and expenses in line with company regulation
Submit Financial Accounts and Corporation tax return each year (as well as a self-assessment tax return for you as a director and shareholder)
Ultimately the choice as to whether operate as a sole trader or a limited company is completely up to you and personal to your specific situation.
If you are looking for a simple way to set up as a marketing professional then a sole trader is probably the best place to start. However, there are certainly many advantages to operating as a limited company, especially if you intend to grow and scale your business in the future.
Whichever option you are leaning to we always recommend you discuss it with an accountant to get their professional opinion and ensure you are set up correctly from the start. We offer a free consultation call for new clients, contact us here.
Register yourself as a marketing professional
Once you have decided on an operating structure you will register your marketing business. The process is different for sole traders and limited companies.
Self-employed/Sole trader registration
Registering as a sole trader is fairly straightforward, you must create a government gateway account with HMRC and complete the registration from.
You’ll receive a letter with your Unique Taxpayer Reference (UTR) number within 10 days and subsequently you will receive an activation code. You will need your government gateway log in details and UTR number to file your taxes, so make sure to keep it safe.
Once you are registered you will be required to keep on top of your record keeping and deadlines for filing your tax return.
Limited company registration
To start up as a limited company there are a few more steps that need to be taken.
Decide on a company name
Decide who will be the director(s) of the company
Decide who will be the shareholder(s) of the company
Prepare documents on how to run the company (articles of association)
Incorporate your company with Companies House
Register for Corporation Tax (and other taxes such as PAYE and VAT as appropriate) with HMRC
We would recommend using a professional to help you with registration of a Limited Company to ensure you meet all of the legislation requirements.
Apply for a bank account for your marketing business
The number one thing you should always do when you set up as a marketing professional, whether you are self-employed or a limited company, is set up a business bank account specific to your marketing work.
Setting up a business bank account means that you are able to keep all of your marketing income and expenditure separate from your personal finances. This makes is much easier when you come to your tax and accounts at year end. Furthermore, as a Limited Company you are required to have a company bank account as the company is a separate legal entity in its own right.
What is required to set up a company bank account?
It is easy to set up a bank account. You will provide the bank with the following information:
Business name and address
Photo identification such as a driver’s license or passport and proof of address
They may require a letter from your accountant
What banks could I look at?
You can apply for a business bank account from most banks. You could choose a traditional high street bank or an online bank.
There are a few things you should consider whilst deciding which bank to go with such as:
Are there any extras/benefits you will receive as part of using that bank account?
How quick is it to set up?
Is there a fee? If so, is it a one off fee or monthly?
Is there an app?
Apply for appropriate insurance
As a marketing professional there are many types of insurance that may be applicable to you, such as public liability insurance, employers liability and professional liability insurance.
Public Liability Insurance
Public liability insurance is an insurance product for business owners. It protects you in case your business is brought to court by a client, a customer or a member of the public. If your business is sued, public liability insurance will cover the cost of your legal defence, plus any compensation or settlement money you have to pay out.
Public liability doesn’t cover any injury to yourself or your employees. It covers the cost of legal action and compensation claims made against your business if a third party is injured or their property suffers damage while at your business premises or when you are working in their home, office or business property.
You’re not legally required to have public liability insurance, but if you’re a business owner the chances are you’ll need it. Public liability insurance covers your costs if someone else sues your business – and without cover, unexpected legal costs could bankrupt your business.
Public liability insurance is particularly important if your business involves interacting with the public. If a customer has an accident on your premises, they might sue. You may still need public liability insurance if your business doesn’t have a physical premises. If you’re a marketing professional, you could accidentally damage a client’s property while visiting them. Even if you sell your services from home, there’s always a chance that a customer could bring you to court.
Employers Liability Insurance
Employers’ liability insurance covers you and your business for compensation costs if an employee becomes ill or injured as a result of the work they do for you. It’s legally required of all businesses with one or more employees.
Employers’ liability insurance is a legal requirement if you have employees – including many types of subcontractor. If you are caught without cover, your business can be fined up to £2,500 per employee per day.
Professional Liability Insurance
Professional indemnity insurance can cover compensation payments and legal fees if a client makes a claim against you. The compensation payment will usually take into account the financial loss that the client has suffered.
Imagine, for example, that you are handling client data, but you or an employee copies the wrong person into an email when sending on the data. Your client sues you for breach of confidentiality. In this case, your professional indemnity insurance could pay for the cost of the compensation claim, along with legal expenses.
Professional indemnity insurance isn’t mandatory under the law, but, as mentioned above, protects you and your business if something goes wrong. It’s also required by some client contracts.
How much is insurance for a marketing professional?
The cost of insurance will differ depending on the size of your business and the services you provide. There are a lot of comparison search engines online which will help you decide which insurance is best for you and your business, speaking to an insurance broker will also allow you to get quotes from a variety of insurers.
Understand your record keeping requirements
The requirements for record keeping for sole traders and limited companies are different.
Self-employed/Sole Trader
As a sole trader you must keep records of your marketing income and expenses for your tax return.
Types of proof include:
All receipts for goods, services and stock
Bank statements
Sales invoices, till rolls and bank slips etc.
How to keep track of records?
As a sole trader it is possible to keep track of records in a spreadsheet (though this is likely to change in the future with the implementation of Making Tax Digital for income tax). We would recommend looking at your records on a regular basis e.g. once a month and entering all income and expenditure. This means when you come to complete your tax return at the end of the year you have all your details in one place. As a sole trader you could also use an accounting software system, see limited company section for further details regarding accounting software.
Limited company
As a limited company you are required to keep more records than as a sole trader.
Records about the company
Details of directors, shareholders and company secretaries
The results of any shareholder votes and resolutions
Any details for the company to repay loans at a specific date in the future and who they must be paid back to
Details for the company to make payments if something goes wrong and it’s the company’s fault
Transactions when someone buys shares in the company
Loans or mortgages secured against the company’s assets
Accounting records
All money received and spent by the company, including grants and payments from support schemes e.g. coronavirus support scheme
Details of assets owned by the company
Debts the company owes or is owed
Stock the company owns at the end of the financial year
All goods/services bought and sold and who you bought and sold them to and from
How to keep track of records?
As a limited company we would not recommend keeping track of your records using a spreadsheet. We would instead recommend you use an accounting software.
The benefits of using cloud accounting software is that it provides 24/7 access to all your financial data from anywhere in the world, electronic filing for all of your invoices and receipts to minimise the need for paper and integration with multiple applications such as Hubdoc, Shopify and PayPal.
This could mean for example that when you invoice for a piece of branding work you have completed for a client the software will automatically speak to PayPal and when the client pays the records will be updated in the system to show the invoice as paid without you having to do anything. The other great thing is that your accountant has real time access to the software to help you with any queries you have.
Examples of accounting software are Xero, Quickbooks and Freeagent. As partners of Xero we would highly recommend this as a great tool but as always research to decide which software suits you best.
Understanding your accounting and tax requirements
There are different requirements for sole traders and limited companies when it comes to accounting and tax.
Self-employed/Sole trader
As a sole trader you are required to complete a self-assessment tax return at the end of each tax year. You will be required to complete the tax return including detail from the 6th April in one year to the 5th April the following year and you have until the 31st January after the tax year ends to file your tax return (assuming your year end is in line with the tax year).
For example:
You register as a marketing professional on the 6th April 2020, you will complete a tax return for the year ending the 5th April 2021 and you will have until the 31st January 2022 to complete the return.
You must include all taxable income on your self-assessment tax return.
As a sole trader you can complete the return yourself on the HMRC website or you can engage an accountant to complete it for you.
Limited Company
In keeping with the trend of limited companies being more complex, there are more accounting and tax requirements for a company.
As a limited company you must complete the following:
Corporation tax return to the financial year end
Company accounts to the financial year end
Confirmation statement
Dividend vouchers & minutes
VAT returns (if appliable)
PAYE returns (if applicable)
For your corporation tax and company accounts you have until 9 months after your financial year end to complete them.
For limited companies, the financial year is generally set according to when the company was incorporated. In the UK, companies are given an accounting reference date (ARD) which refers to the last day in the month the company was incorporated.
For example, if a company incorporated on 20th of May, their ARD would be the 31st of May. Their financial year would therefore run from June 1st – May 31st.
What happens if you miss your deadlines?
If your deadlines are not met, as either a sole trader or a limited company you will incur penalties and often interest.
To ensure you comply with financial regulatory standards we would recommend using an accountant to complete these for your company.
Round up
You may be feeling overwhelmed by the information detailed within this guide, so to break it down the next steps to do are:
Decide if you will operate as a sole trader or as a limited company
Register as self-employed or incorporate your company
Open a business bank account
Apply for appropriate business insurance
Decide how you will maintain your records; spreadsheet or accounting software
Put the accounting deadlines in your calendar so you ensure you meet all requirements
A great idea before deciding on any of the above, would be to speak to us about becoming a marketing professional. We will make sure you understand exactly how to get started and ensure you are being tax efficient and complying with all the rules and legislation.
If you would like to get in touch with us, we offer a free no obligation consultation where we can discuss all of the above steps and support you in your journey to becoming a marketing professional.
Related questions
What is a confirmation statement?
A confirmation statement (CS01) is a snapshot of general information about a company’s directors, secretary (where one has been appointed), registered office address, shareholders, share capital and people with significant control.
What is a Limited Liability Partnership?
A Partnership is an arrangement between two or more people to manage and operate a business and share its profits. The profits are shared in line with the agreed partnership terms, for example if there were two partners this could be 50% for each partner or 75% for one partner and 25% for the other.
For example, Accountants, Doctors, Dentists or Solicitors often operate in a partnership.
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.
There are many reasons why you may want to become a freelance yoga instructor. It might be that you are fed up of working for someone else, you would love to be your own boss or you want to choose your own hours and work from home. Whatever the reason, we have put together a guide to talk you through the steps on how to become a yoga instructor.
How to become a freelance yoga instructor:
Choose your business structure
Register your business
Get a business bank account
Get appropriate insurance
Understanding record keeping requirements
Understanding accounting and tax requirements
In this guide we walk through each of these steps in detail to give you the confidence and knowledge required to become a yoga instructor.
Choose your business structure for your freelance yoga business
You have decided you want to become a freelance yoga instructor, but don’t know where to start. There are multiple options when deciding what structure is for you, the most common structures include:
Other such as; Joint ventures, charities and community interest companies
For the purposes of our becoming a yoga instructor guide there are two structures that we will focus on; Self-employed and Limited Companies. For further detail on other business types please get in touch.
Do you need an accountant which specialises in Yoga Instructors?
So what is the difference between being a sole trader and a limited company?
To put it simply, being a self-employed/sole trader means you are trading as an individual, while being a limited company means you are trading as a company, albeit a company of one.
Self-employed/Sole Trader
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 run classes alone and take responsibility for the success or failure of their yoga work. As a yoga instructor this would mean you would have to go out and find clients yourself.
Benefits of a yoga instructor being self-employed
Simple freelance business structure without the administration burden of a Limited Company
Free and simple registration of your business with HMRC
Flexible freelance business structure that can later transition to a Limited Company
Considerations of a yoga instructor being self-employed
You are personally responsible for any losses the freelance business makes
You are taxed at income tax rates which can be less tax efficient than operating as a Limited Company
Potential Clients may see sole-traders as less attractive than Limited Companies
What is required of you as a self-employed individual
Register with HMRC at gov.uk
Record keeping of all income and expenses
Submit a tax return each year
Limited Company
Many of the indicators of a self-employed individual also apply to owners of a limited company, however, instead of being self-employed you are considered both an owner (shareholder) and office holder (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 as a yoga instructor.
Benefits of a yoga instructor operating as a Limited Company
Retain more of profits by utilising tax efficiencies
Limited personal liability, this means that if a Company is in debt, the personal assets and finances of the shareholders will be protected by law
Limited companies have a certain level of prestige in terms of brand image that sole traders do not
Considerations for a yoga instructor operating as a Limited Company
More complex and expensive to set up than a sole trader
Limited company accounts and tax are more technical than a sole trader
There are additional costs incurred when operating a limited company
What is required if you register as a Limited Company
Incorporate your company with Companies house and register for company tax with HMRC
Record keeping of income and expenses in line with company regulation
Submit Financial Accounts and Corporation tax return each year (as well as a self-assessment tax return for you as a director and shareholder)
Ultimately the choice as to whether operate as a sole trader or a limited company is completely up to you and personal to your specific situation.
If you are looking for a simple way to set up as a yoga instructor then a sole trader is probably the best place to start. However, there are certainly many advantages to operating as a limited company, especially if you intend to grow and scale your business in the future.
Whichever option you are leaning to we always recommend you discuss it with an accountant to get their professional opinion and ensure you are set up correctly from the start. We offer a free consultation call for new clients, contact us here.
Register yourself as a yoga instructor
Once you have decided on an operating structure you will register your yoga business. The process is different for sole traders and limited companies.
Self-employed/Sole trader registration
Registering as a sole trader is fairly straightforward, you must create a government gateway account with HMRC and complete the registration from.
You’ll receive a letter with your Unique Taxpayer Reference (UTR) number within 10 days and subsequently you will receive an activation code. You will need your government gateway log in details and UTR number to file your taxes, so make sure to keep it safe.
Once you are registered you will be required to keep on top of your record keeping and deadlines for filing your tax return.
Limited company registration
To start up as a limited company there are a few more steps that need to be taken.
Decide on a company name
Decide who will be the director(s) of the company
Decide who will be the shareholder(s) of the company
Prepare documents on how to run the company (articles of association)
Incorporate your company with Companies House
Register for Corporation Tax (and other taxes such as PAYE and VAT as appropriate) with HMRC
We would recommend using a professional to help you with registration of a Limited Company to ensure you meet all of the legislation requirements.
Apply for a bank account for your yoga instructor business
The number one thing you should always do when you set up as a yoga instructor, whether you are self-employed or a limited company, is set up a business bank account specific to your work.
Setting up a business bank account means that you are able to keep all of your yoga income and expenditure separate from your personal finances. This makes is much easier when you come to your tax and accounts at year end. Furthermore, as a Limited Company you are required to have a company bank account as the company is a separate legal entity in its own right.
What is required to set up a bank account?
It is easy to set up a bank account. You will provide the bank with the following information:
Business name and address
Photo identification such as a driver’s license or passport and proof of address
They may require a letter from your accountant
What banks could I look at?
You can apply for a business bank account from most banks. You could choose a traditional high street bank or an online bank.
There are a few things you should consider whilst deciding which bank to go with such as:
Are there any extras/benefits you will receive as part of using that bank account?
How quick is it to set up?
Is there a fee? If so, is it a one off fee or monthly?
Is there an app?
Apply for appropriate insurance
As a yoga instructor there are many types of insurance that may be applicable to you, such as public liability insurance, employers liability and professional liability insurance.
Public Liability Insurance
Public liability insurance is an insurance product for business owners. It protects you in case your business is brought to court by a client, a customer or a member of the public. If your business is sued, public liability insurance will cover the cost of your legal defence, plus any compensation or settlement money you have to pay out.
Public liability doesn’t cover any injury to yourself or your employees. It covers the cost of legal action and compensation claims made against your business if a third party is injured or their property suffers damage while at your business premises or when you are working in their home, office or business property.
You’re not legally required to have public liability insurance, but if you’re a business owner the chances are you’ll need it. Public liability insurance covers your costs if someone else sues your business – and without cover, unexpected legal costs could bankrupt your business.
Public liability insurance is particularly important if your business involves interacting with the public. If a customer has an accident on your premises, they might sue. You may still need public liability insurance if your business doesn’t have a physical premises. If you’re a yoga instructor, you could accidentally damage a client’s property while visiting them. Even if you sell your services from home, there’s always a chance that a customer could bring you to court.
Employers Liability Insurance
Employers’ liability insurance covers you and your business for compensation costs if an employee becomes ill or injured as a result of the work they do for you. It’s legally required of all businesses with one or more employees.
Employers’ liability insurance is a legal requirement if you have employees – including many types of subcontractor. If you are caught without cover, your business can be fined up to £2,500 per employee per day.
Professional Liability Insurance
Professional indemnity insurance can cover compensation payments and legal fees if a client makes a claim against you. The compensation payment will usually take into account the financial loss that the client has suffered.
Imagine, for example, that you are handling client data, but you or an employee copies the wrong person into an email when sending on the data. Your client sues you for breach of confidentiality. In this case, your professional indemnity insurance could pay for the cost of the compensation claim, along with legal expenses.
Professional indemnity insurance isn’t mandatory under the law, but, as mentioned above, protects you and your business if something goes wrong. It’s also required by some client contracts.
How much is insurance for teaching yoga?
The cost of insurance will differ depending on the size of your business and the services you provide. There are a lot of comparison search engines online which will help you decide which insurance is best for you and your business, speaking to an insurance broker will also allow you to get quotes from a variety of insurers.
Understand your record-keeping requirements
The requirements for record keeping for sole traders and limited companies are different.
Self-employed/Sole Trader
As a sole trader you must keep records of your yoga teaching income and expenses for your tax return.
Types of proof include:
All receipts for goods, services and stock
Bank statements
Sales invoices, till rolls and bank slips etc.
How to keep track of records?
As a sole trader it is possible to keep track of records in a spreadsheet (though this is likely to change in the future with the implementation of Making Tax Digital for income tax). We would recommend looking at your records on a regular basis e.g. once a month and entering all income and expenditure. This means when you come to complete your tax return at the end of the year you have all your details in one place. As a sole trader you could also use an accounting software system, see limited company section for further details regarding accounting software.
Limited company
As a limited company you are required to keep more records than as a sole trader.
Records about the company
Details of directors, shareholders and company secretaries
The results of any shareholder votes and resolutions
Any details for the company to repay loans at a specific date in the future and who they must be paid back to
Details for the company to make payments if something goes wrong and it’s the company’s fault
Transactions when someone buys shares in the company
Loans or mortgages secured against the company’s assets
Accounting records
All money received and spent by the company, including grants and payments from support schemes e.g. coronavirus support scheme
Details of assets owned by the company
Debts the company owes or is owed
Stock the company owns at the end of the financial year
All goods/services bought and sold and who you bought and sold them to and from
How to keep track of records?
As a limited company we would not recommend keeping track of your records using a spreadsheet. We would instead recommend you use an accounting software.
The benefits of using cloud accounting software is that it provides 24/7 access to all your financial data from anywhere in the world, electronic filing for all of your invoices and receipts to minimise the need for paper and integration with multiple applications such as Hubdoc, Shopify and PayPal.
This could mean for example that when you invoice for a piece of branding work you have completed for a client the software will automatically speak to PayPal and when the client pays the records will be updated in the system to show the invoice as paid without you having to do anything. The other great thing is that your accountant has real time access to the software to help you with any queries you have.
Examples of accounting software are Xero, Quickbooks and Freeagent. As partners of Xero we would highly recommend this as a great tool but as always research to decide which software suits you best.
Understand your accounting and tax requirements
There are different requirements for sole traders and limited companies when it comes to accounting and tax.
Self-employed/Sole trader
As a sole trader you are required to complete a self-assessment tax return at the end of each tax year. You will be required to complete the tax return including detail from the 6th April in one year to the 5th April the following year and you have until the 31st January after the tax year ends to file your tax return (assuming your year end is in line with the tax year).
For example:
You register as a yoga instructor on the 6th April 2020, you will complete a tax return for the year ending the 5th April 2021 and you will have until the 31st January 2022 to complete the return.
You must include all taxable income on your self-assessment tax return.
As a sole trader you can complete the return yourself on the HMRC website or you can engage an accountant to complete it for you
Limited Company
In keeping with the trend of limited companies being more complex, there are more accounting and tax requirements for a company.
As a limited company you must complete the following:
Corporation tax return to the financial year end
Company accounts to the financial year end
Confirmation statement
Dividend vouchers & minutes
VAT returns (if appliable)
PAYE returns (if applicable)
For your corporation tax and company accounts you have until 9 months after your financial year end to complete them.
For limited companies, the financial year is generally set according to when the company was incorporated. In the UK, companies are given an accounting reference date (ARD) which refers to the last day in the month the company was incorporated.
For example, if a company incorporated on 20th of May, their ARD would be the 31st of May. Their financial year would therefore run from June 1st – May 31st.
What happens if you miss your deadlines?
If your deadlines are not met, as either a sole trader or a limited company you will incur penalties and often interest.
To ensure you comply with financial regulatory standards we would recommend using an accountant to complete these for your company.
Round up
You may be feeling overwhelmed by the information detailed within this guide, so to break it down the next steps to do are:
Decide if you will operate as a sole trader or as a limited company
Register as self-employed or incorporate your company
Open a business bank account
Apply for appropriate business insurance
Decide how you will maintain your records; spreadsheet or accounting software
Put the accounting deadlines in your calendar so you ensure you meet all requirements
A great idea before deciding on any of the above, would be to speak to us about becoming a yoga instructor. We will make sure you understand exactly how to get started and ensure you are being tax efficient and complying with all the rules and legislation.
If you would like to get in touch with us, we offer a free no obligation consultation where we can discuss all of the above steps and support you in your journey to becoming a yoga instructor.
Related questions
What is a confirmation statement?
A confirmation statement (CS01) is a snapshot of general information about a company’s directors, secretary (where one has been appointed), registered office address, shareholders, share capital and people with significant control.
What is a Limited Liability Partnership?
A Partnership is an arrangement between two or more people to manage and operate a business and share its profits. The profits are shared in line with the agreed partnership terms, for example if there were two partners this could be 50% for each partner or 75% for one partner and 25% for the other.
For example, Accountants, Doctors, Dentists or Solicitors often operate in a partnership.
What expenses are allowable for a yoga instructor?
When it comes to claiming expenses as a business the rule that you need to remember is that the expense must be ‘Wholly and Exclusively’ for the trade. As a yoga instructor if you have to provide your own yoga mat and blocks for your classes these would be an allowable expense as you are required to have these to be able to teach your classes.
There are many reasons why you may want to become a Pilates instructor. It might be that you are fed up of working for someone else, you would love to be your own boss or you want to choose your own hours and work from home. Whatever the reason, we have put together a guide to talk you through the steps on how to become a Pilates instructor.
How to become a Pilates instructor:
Choose your business structure
Register your business
Get a business bank account
Get appropriate insurance
Understanding record keeping requirements
Understanding accounting and tax requirements
In this guide we walk through each of these steps in detail to give you the confidence and knowledge required to become a Pilates instructor.
Choose your business structure to become a Pilates instructor
You have decided you want to become a Pilates instructor, but don’t know where to start. There are multiple options when deciding what structure is for you, the most common structures include:
Other, such as; Joint ventures, charities and community interest companies
For the purposes of our becoming a Pilates instructor guide there are two structures that we will focus on; Self-employed and Limited Companies. For further detail on other business types please get in touch.
So what is the difference between being a sole trader and a limited company?
To put it simply, being a self-employed/sole trader means you are trading as an individual, while being a limited company means you are trading as a company, albeit a company of one.
Self-employed/Sole Trader
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 design work or customers themselves and take responsibility for the success or failure of their Pilates work. As a Pilates instructor this would mean you would have to go out and find clients yourself.
Benefits of a Pilates instructor being self-employed
Simple freelance business structure without the administration burden of a Limited Company
Free and simple registration of your business with HMRC
Flexible freelance business structure that can later transition to a Limited Company
Considerations of a Pilates instructor being self-employed
You are personally responsible for any losses the freelance business makes
You are taxed at income tax rates which can be less tax efficient than operating as a Limited Company
Potential Clients may see sole-traders as less attractive than Limited Companies
What is required of you as a self-employed individual
Register with HMRC at gov.uk
Record keeping of all income and expenses
Submit a tax return each year
Limited Company
Many of the indicators of a self-employed individual also apply to owners of a limited company, however, instead of being self-employed you are considered both an owner (shareholder) and office holder (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 as a Pilates instructor.
Benefits of a Pilates instructor operating as a Limited Company
Retain more of profits by utilising tax efficiencies
Limited personal liability, this means that if a Company is in debt, the personal assets and finances of the shareholders will be protected by law
Limited companies have a certain level of prestige in terms of brand image that sole traders do not
Considerations for a Pilates instructor operating as a Limited Company
More complex and expensive to set up than a sole trader
Limited company accounts and tax are more technical than a sole trader
There are additional costs incurred when operating a limited company
What is required if you register as a Limited Company
Incorporate your company with Companies house and register for company tax with HMRC
Record keeping of income and expenses in line with company regulation
Submit Financial Accounts and Corporation tax return each year (as well as a self-assessment tax return for you as a director and shareholder)
Ultimately the choice as to whether operate as a sole trader or a limited company is completely up to you and personal to your specific situation.
If you are looking for a simple way to set up as a Pilates instructor then a sole trader is probably the best place to start. However, there are certainly many advantages to operating as a limited company, especially if you intend to grow and scale your business in the future.
Whichever option you are leaning to we always recommend you discuss it with an accountant to get their professional opinion and ensure you are set up correctly from the start. We offer a free consultation call for new clients, contact us here.
Register yourself as a Pilates instructor
Once you have decided on an operating structure you will register your Pilates business. The process is different for sole traders and limited companies.
Self-employed/Sole trader registration
Registering as a sole trader is fairly straightforward, you must create a government gateway account with HMRC and complete the registration from.
You’ll receive a letter with your Unique Taxpayer Reference (UTR) number within 10 days and subsequently you will receive an activation code. You will need your government gateway log in details and UTR number to file your taxes, so make sure to keep it safe.
Once you are registered you will be required to keep on top of your record keeping and deadlines for filing your tax return.
Limited company registration
To start up as a limited company there are a few more steps that need to be taken.
Decide on a company name
Decide who will be the director(s) of the company
Decide who will be the shareholder(s) of the company
Prepare documents on how to run the company (articles of association)
Incorporate your company with Companies House
Register for Corporation Tax (and other taxes such as PAYE and VAT as appropriate) with HMRC
We would recommend using a professional to help you with registration of a Limited Company to ensure you meet all of the legislation requirements.
Apply for a bank account for your Pilates business
The number one thing you should always do when you set up as a Pilates instructor, whether you are self-employed or a limited company, is set up a business bank account specific to your work.
Setting up a business bank account means that you are able to keep all of your Pilates income and expenditure separate from your personal finances. This makes is much easier when you come to your tax and accounts at year end. Furthermore, as a Limited Company you are required to have a company bank account as the company is a separate legal entity in its own right.
What is required to set up a bank account?
It is easy to set up a bank account. You will provide the bank with the following information:
Business name and address
Photo identification such as a driver’s license or passport and proof of address
They may require a letter from your accountant
What banks could I look at?
You can apply for a business bank account from most banks. You could choose a traditional high street bank or an online bank.
There are a few things you should consider whilst deciding which bank to go with such as:
Are there any extras/benefits you will receive as part of using that bank account?
How quick is it to set up?
Is there a fee? If so, is it a one off fee or monthly?
Is there an app?
Apply for appropriate insurance
As a Pilates instructor there are many types of insurance that may be applicable to you, such as public liability insurance, employers liability and professional liability insurance.
Public Liability Insurance
Public liability insurance is an insurance product for business owners. It protects you in case your business is brought to court by a client, a customer or a member of the public. If your business is sued, public liability insurance will cover the cost of your legal defence, plus any compensation or settlement money you have to pay out.
Public liability doesn’t cover any injury to yourself or your employees. It covers the cost of legal action and compensation claims made against your business if a third party is injured or their property suffers damage while at your business premises or when you are working in their home, office or business property.
You’re not legally required to have public liability insurance, but if you’re a business owner the chances are you’ll need it. Public liability insurance covers your costs if someone else sues your business – and without cover, unexpected legal costs could bankrupt your business.
Public liability insurance is particularly important if your business involves interacting with the public. If a customer has an accident on your premises, they might sue. You may still need public liability insurance if your business doesn’t have a physical premises. If you’re a Pilates instructor, you could accidentally damage a client’s property while visiting them. Even if you sell your services from home, there’s always a chance that a customer could bring you to court.
Employers Liability Insurance
Employers’ liability insurance covers you and your business for compensation costs if an employee becomes ill or injured as a result of the work they do for you. It’s legally required of all businesses with one or more employees.
Employers’ liability insurance is a legal requirement if you have employees – including many types of subcontractor. If you are caught without cover, your business can be fined up to £2,500 per employee per day.
Professional Liability Insurance
Professional indemnity insurance can cover compensation payments and legal fees if a client makes a claim against you. The compensation payment will usually take into account the financial loss that the client has suffered.
Imagine, for example, that you are handling client data, but you or an employee copies the wrong person into an email when sending on the data. Your client sues you for breach of confidentiality. In this case, your professional indemnity insurance could pay for the cost of the compensation claim, along with legal expenses.
Professional indemnity insurance isn’t mandatory under the law, but, as mentioned above, protects you and your business if something goes wrong. It’s also required by some client contracts.
How much are these insurances for Pilates Instructors?
The cost of insurance will differ depending on the size of your business and the services you provide. There are a lot of comparison search engines online which will help you decide which insurance is best for you and your business, speaking to an insurance broker will also allow you to get quotes from a variety of insurers.
Understand your record-keeping requirements
The requirements for record keeping for sole traders and limited companies are different.
Self-employed/Sole Trader
As a sole trader you must keep records of your pilates income and expenses for your tax return.
Types of proof include:
All receipts for goods, services and stock
Bank statements
Sales invoices, till rolls and bank slips etc.
How to keep track of records?
As a sole trader it is possible to keep track of records in a spreadsheet (though this is likely to change in the future with the implementation of Making Tax Digital for income tax). We would recommend looking at your records on a regular basis e.g. once a month and entering all income and expenditure. This means when you come to complete your tax return at the end of the year you have all your details in one place. As a sole trader you could also use an accounting software system, see limited company section for further details regarding accounting software.
Limited company
As a limited company you are required to keep more records than as a sole trader.
Records about the company
Details of directors, shareholders and company secretaries
The results of any shareholder votes and resolutions
Any details for the company to repay loans at a specific date in the future and who they must be paid back to
Details for the company to make payments if something goes wrong and it’s the company’s fault
Transactions when someone buys shares in the company
Loans or mortgages secured against the company’s assets
Accounting records
All money received and spent by the company, including grants and payments from support schemes e.g. coronavirus support scheme
Details of assets owned by the company
Debts the company owes or is owed
Stock the company owns at the end of the financial year
All goods/services bought and sold and who you bought and sold them to and from
How to keep track of records?
As a limited company we would not recommend keeping track of your records using a spreadsheet. We would instead recommend you use an accounting software.
The benefits of using cloud accounting software is that it provides 24/7 access to all your financial data from anywhere in the world, electronic filing for all of your invoices and receipts to minimise the need for paper and integration with multiple applications such as Hubdoc, Shopify and PayPal.
This could mean for example that when you invoice for a piece of branding work you have completed for a client the software will automatically speak to PayPal and when the client pays the records will be updated in the system to show the invoice as paid without you having to do anything. The other great thing is that your accountant has real time access to the software to help you with any queries you have.
Examples of accounting software are Xero, Quickbooks and Freeagent. As partners of Xero we would highly recommend this as a great tool but as always research to decide which software suits you best.
Understanding your accounting and tax requirements
There are different requirements for sole traders and limited companies when it comes to accounting and tax.
Self-employed/Sole trader
As a sole trader you are required to complete a self-assessment tax return at the end of each tax year. You will be required to complete the tax return including detail from the 6th April in one year to the 5th April the following year and you have until the 31st January after the tax year ends to file your tax return (assuming your year end is in line with the tax year).
For example:
You register as a Pilates instructor on the 6th April 2020, you will complete a tax return for the year ending the 5th April 2021 and you will have until the 31st January 2022 to complete the return.
You must include all taxable income on your self-assessment tax return.
As a sole trader you can complete the return yourself on the HMRC website or you can engage an accountant to complete it for you.
Limited Company
In keeping with the trend of limited companies being more complex, there are more accounting and tax requirements for a company.
As a limited company you must complete the following:
Corporation tax return to the financial year end
Company accounts to the financial year end
Confirmation statement
Dividend vouchers & minutes
VAT returns (if appliable)
PAYE returns (if applicable)
For your corporation tax and company accounts you have until 9 months after your financial year end to complete them.
For limited companies, the financial year is generally set according to when the company was incorporated. In the UK, companies are given an accounting reference date (ARD) which refers to the last day in the month the company was incorporated.
For example, if a company incorporated on 20th of May, their ARD would be the 31st of May. Their financial year would therefore run from June 1st – May 31st.
What happens if you miss your deadlines?
If your deadlines are not met, as either a sole trader or a limited company you will incur penalties and often interest.
To ensure you comply with financial regulatory standards we would recommend using an accountant to complete these for your company.
Round up
You may be feeling overwhelmed by the information detailed within this guide, so to break it down the next steps to do are:
Decide if you will operate as a sole trader or as a limited company
Register as self-employed or incorporate your company
Open a business bank account
Apply for appropriate business insurance
Decide how you will maintain your records; spreadsheet or accounting software
Put the accounting deadlines in your calendar so you ensure you meet all requirements
A great idea before deciding on any of the above, would be to speak to us about becoming a Pilates instructor. We will make sure you understand exactly how to get started and ensure you are being tax efficient and complying with all the rules and legislation.
If you would like to get in touch with us, we offer a free no obligation consultation where we can discuss all of the above steps and support you in your journey to becoming a Pilates instructor.
Related questions
What is a confirmation statement?
A confirmation statement (CS01) is a snapshot of general information about a company’s directors, secretary (where one has been appointed), registered office address, shareholders, share capital and people with significant control.
What is a Limited Liability Partnership?
A Partnership is an arrangement between two or more people to manage and operate a business and share its profits. The profits are shared in line with the agreed partnership terms, for example if there were two partners this could be 50% for each partner or 75% for one partner and 25% for the other.
For example, Accountants, Doctors, Dentists or Solicitors often operate in a partnership
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.
There are many reasons why you may want to go freelance. It might be that you are fed up of working for someone else, you would love to be your own boss or you want to choose your own hours and work from home. Whatever the reason, we have put together a guide to talk you through the steps on how to become a freelance graphic designer.
How to become a freelance graphic designer:
Choose your business structure
Register your business
Get a business bank account
Get appropriate insurance
Understanding record keeping requirements
Understanding accounting and tax requirements
In this guide we walk through each of these steps in detail to give you the confidence and knowledge required to become a freelance graphic designer.
Choose your business structure for your freelance graphic design business
You have decided you want to become a freelance graphic designer, but don’t know where to start. There are multiple options when deciding what structure is for you, the most common structures include:
Other, such as; Joint ventures, charities and community interest companies
For the purposes of our becoming a freelance graphic designer guide there are two structures that we will focus on; Self-employed and Limited Companies. For further detail on other business types, please get in touch.
So what is the difference between being a sole trader and a limited company?
To put it simply, being a self-employed/sole trader means you are trading as an individual, while being a limited company means you are trading as a company, albeit a company of one.
Do you need an accountant which specialises in graphic designers?
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 design work or customers themselves and take responsibility for the success or failure of their freelance graphic design work. As a freelance graphic designer this would mean you would have to go out and find clients yourself.
Benefits of a freelance graphic designer being self-employed
Simple freelance business structure without the administration burden of a Limited Company
Free and simple registration of your business with HMRC
Flexible freelance business structure that can later transition to a Limited Company
Considerations of a freelance graphic designer being self-employed
You are personally responsible for any losses the freelance business makes
You are taxed at income tax rates which can be less tax efficient than operating as a Limited Company
Potential Clients may see sole traders as less attractive than Limited Companies
What is required of you as a self-employed individual
Register with HMRC at gov.uk
Record keeping of all income and expenses
Submit a tax return each year
Limited Company
Many of the indicators of a self-employed individual also apply to owners of a limited company, however, instead of being self-employed you are considered both an owner (shareholder) and office holder (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 as a freelance graphic designer.
Benefits of a freelance graphic designer operating as a Limited Company
Retain more of profits by utilising tax efficiencies
Limited personal liability, this means that if a Company is in debt, the personal assets and finances of the shareholders will be protected by law
Limited companies have a certain level of prestige in terms of brand image that sole traders do not
Considerations of a freelance graphic designer operating as a Limited Company
More complex and expensive to set up than a sole trader
Limited company accounts and tax are more technical than a sole trader
There are additional costs incurred when operating a limited company
What is required if you register as a Limited Company
Incorporate your company with Companies house and register for company tax with HMRC
Record keeping of income and expenses in line with company regulation
Submit Financial Accounts and Corporation tax return each year (as well as a self-assessment tax return for you as a director and shareholder)
Ultimately the choice as to whether operate as a sole trader or a limited company is completely up to you and personal to your specific situation.
If you are looking for a simple way to set up as a freelance graphic designer then a sole trader is probably the best place to start. However, there are certainly many advantages to operating as a limited company, especially if you intend to grow and scale your business in the future.
Whichever option you are leaning to we always recommend you discuss it with an accountant to get their professional opinion and ensure you are set up correctly from the start. We offer a free consultation call for new clients, contact us here.
Registering yourself as a freelance graphic design business
Once you have decided on an operating structure you will register your freelance graphic design business. The process is different for sole traders and limited companies.
Self-employed/Sole trader registration
Registering as a sole trader is fairly straightforward, you must create a government gateway account with HMRC and complete the registration from.
You’ll receive a letter with your Unique Taxpayer Reference (UTR) number within 10 days and subsequently you will receive an activation code. You will need your government gateway log in details and UTR number to file your taxes, so make sure to keep it safe.
Once you are registered you will be required to keep on top of your record keeping and deadlines for filing your tax return.
Limited company registration
To start up as a limited company there are a few more steps that need to be taken.
Decide on a company name
Decide who will be the director(s) of the company
Decide who will be the shareholder(s) of the company
Prepare documents on how to run the company (articles of association)
Incorporate your company with Companies House
Register for Corporation Tax (and other taxes such as PAYE and VAT as appropriate) with HMRC
We would recommend using a professional to help you with registration of a Limited Company to ensure you meet all of the legislation requirements.
Apply for a bank account for your freelance design business
The number one thing you should always do when you set up as a freelance designer, whether you are self-employed or a limited company, is set up a business bank account specific to your freelance design work.
Setting up a business bank account means that you are able to keep all of your graphic design income and expenditure separate from your personal finances. This makes is much easier when you come to your tax and accounts at year end. Furthermore, as a Limited Company you are required to have a company bank account as the company is a separate legal entity in its own right.
What is required to set up a bank account?
It is easy to set up a bank account. You will provide the bank with the following information:
Business name and address
Photo identification such as a driver’s license or passport and proof of address
They may require a letter from your accountant
What banks could I look at?
You can apply for a business bank account from most banks. You could choose a traditional high street bank or an online bank.
There are a few things you should consider whilst deciding which bank to go with such as:
Are there any extras/benefits you will receive as part of using that bank account?
How quick is it to set up?
Is there a fee? If so, is it a one off fee or monthly?
Is there an app?
Apply for appropriate insurance
As a freelance graphic designer there are many types of insurance that may be applicable to you, such as public liability insurance, employers liability and professional liability insurance.
Public Liability Insurance
Public liability insurance is an insurance product for business owners. It protects you in case your business is brought to court by a client, a customer or a member of the public. If your business is sued, public liability insurance will cover the cost of your legal defence, plus any compensation or settlement money you have to pay out.
Public liability doesn’t cover any injury to yourself or your employees. It covers the cost of legal action and compensation claims made against your business if a third party is injured or their property suffers damage while at your business premises or when you are working in their home, office or business property.
You’re not legally required to have public liability insurance, but if you’re a business owner the chances are you’ll need it. Public liability insurance covers your costs if someone else sues your business – and without cover, unexpected legal costs could bankrupt your business.
Public liability insurance is particularly important if your business involves interacting with the public. If a customer has an accident on your premises, they might sue. You may still need public liability insurance if your business doesn’t have a physical premises. If you’re a freelance graphic designer, you could accidentally damage a client’s property while visiting them. Even if you sell your services from home, there’s always a chance that a customer could bring you to court.
Employers Liability Insurance
Employers’ liability insurance covers you and your business for compensation costs if an employee becomes ill or injured as a result of the work they do for you. It’s legally required of all businesses with one or more employees.
Employers’ liability insurance is a legal requirement if you have employees – including many types of subcontractor. If you are caught without cover, your business can be fined up to £2,500 per employee per day.
Professional Liability Insurance
Professional indemnity insurance can cover compensation payments and legal fees if a client makes a claim against you. The compensation payment will usually take into account the financial loss that the client has suffered.
Imagine, for example, that you are handling client data, but you or an employee copies the wrong person into an email when sending on the data. Your client sues you for breach of confidentiality. In this case, your professional indemnity insurance could pay for the cost of the compensation claim, along with legal expenses.
Professional indemnity insurance isn’t mandatory under the law, but, as mentioned above, protects you and your business if something goes wrong. It’s also required by some client contracts.
How much are these insurances for freelances graphic designers?
The cost of insurance will differ depending on the size of your business and the services you provide. There are a lot of comparison search engines online which will help you decide which insurance is best for you and your business, speaking to an insurance broker will also allow you to get quotes from a variety of insurers.
Understand your record keeping requirements
The requirements for record keeping for sole traders and limited companies are different.
Self-employed/Sole Trader
As a sole trader you must keep records of your graphic design income and expenses for your tax return.
Types of proof include:
All receipts for goods, services and stock
Bank statements
Sales invoices, till rolls and bank slips etc.
How to keep track of records?
As a sole trader it is possible to keep track of records in a spreadsheet (though this is likely to change in the future with the implementation of Making Tax Digital for income tax). We would recommend looking at your records on a regular basis e.g once a month and entering all income and expenditure into a spreadsheet. This means when you come to complete your tax return at the end of the year you have all your details in one place. As a sole trader you could also use an accounting software system, see limited company section for further details regarding accounting software.
Limited company
As a limited company you are required to keep more records than as a sole trader.
Records about the company
Details of directors, shareholders and company secretaries
The results of any shareholder votes and resolutions
Any details for the company to repay loans at a specific date in the future and who they must be paid back to
Details for the company to make payments if something goes wrong and it’s the company’s fault
Transactions when someone buys shares in the company
Loans or mortgages secured against the company’s assets
Accounting records
All money received and spent by the company, including grants and payments from support schemes e.g. coronavirus support scheme
Details of assets owned by the company
Debts the company owes or is owed
Stock the company owns at the end of the financial year
All goods/services bought and sold and who you bought and sold them to and from
How to keep track of records?
As a limited company we would not recommend keeping track of your records using a spreadsheet. We would instead recommend you use an accounting software.
The benefits of using cloud accounting software is that it provides 24/7 access to all your financial data from anywhere in the world, electronic filing for all of your invoices and receipts to minimise the need for paper and integration with multiple applications such as Hubdoc, Shopify and PayPal.
This could mean for example that when you invoice for a piece of branding work you have completed for a client the software will automatically speak to PayPal and when the client pays the records will be updated in the system to show the invoice as paid without you having to do anything. The other great thing is that your accountant has real time access to the software to help you with any queries you have.
Examples of accounting software are Xero, Quickbooks and Freeagent. As partners of Xero we would highly recommend this as a great tool but as always research to decide which software suits you best.
Understanding you accounting and tax requirements
There are different requirements for sole traders and limited companies when it comes to accounting and tax
Self-employed/Sole trader
As a sole trader you are required to complete a self-assessment tax return at the end of each tax year. You will be required to complete the tax return including detail from the 6th April in one year to the 5th April the following year and you have until the 31st January after the tax year ends to file your tax return (assuming your year end is in line with the tax year).
For example:
You register as a freelance graphic designer on the 6th April 2020, you will complete a tax return for the year ending the 5th April 2021 and you will have until the 31st January 2022 to complete the return.
You must include all taxable income on your self-assessment tax return.
As a sole trader you can complete the return yourself on the HMRC website or you can engage an accountant to complete it for you.
Limited Company
In keeping with the trend of limited companies being more complex, there are more accounting and tax requirements for a company.
As a limited company you must complete the following:
Corporation tax return to the financial year end
Company accounts to the financial year end
Confirmation statement
Dividend vouchers & minutes
VAT returns (if appliable)
PAYE returns (if applicable)
For your corporation tax and company accounts you have until 9 months after your financial year end to complete them.
For limited companies, the financial year is generally set according to when the company was incorporated. In the UK, companies are given an accounting reference date (ARD) which refers to the last day in the month the company was incorporated.
For example, if a company incorporated on 20th of May, their ARD would be the 31st of May. Their financial year would therefore run from June 1st – May 31st.
What happens if you miss your deadlines?
If your deadlines are not met, as either a sole trader or a limited company you will incur penalties and often interest.
To ensure you comply with financial regulatory standards we would recommend using an accountant to complete these for your company.
Round up
You may be feeling overwhelmed by the information detailed within this guide, so to break it down the next steps to do are:
Decide if you will operate as a sole trader or as a limited company
Register as self-employed or incorporate your company
Open a business bank account
Apply for appropriate business insurance
Decide how you will maintain your records; spreadsheet or accounting software
Put the accounting deadlines in your calendar so you ensure you meet all requirements
A great idea before deciding on any of the above, would be to speak to us about becoming a freelance graphic designer. We will make sure you understand exactly how to get started and ensure you are being tax efficient and complying with all the rules and legislation.
If you would like to get in touch with us, we offer a free no obligation consultation where we can discuss all of the above steps and support you in your journey to becoming a freelance graphic designer.
Related questions
What is a confirmation statement?
A confirmation statement (CS01) is a snapshot of general information about a company’s directors, secretary (where one has been appointed), registered office address, shareholders, share capital and people with significant control.
What is a Limited Liability Partnership?
A Partnership is an arrangement between two or more people to manage and operate a business and share its profits. The profits are shared in line with the agreed partnership terms, for example if there were two partners this could be 50% for each partner or 75% for one partner and 25% for the other.
For example, Accountants, Doctors, Dentists or Solicitors often operate in a partnership.
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.
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