The Pleasures and Pains of Going Solo

It just goes to show that UK taxes are as convoluted as the US tax system.  They’re incomprehensible in either dialect.

The advice to “save money for a rainy day” seems to have passed across the Atlantic in an intelligible form.

From Times Online UK

“The secret to self employment is keeping the tax man at bay and saving for retirement.”

One of the first things the newly self-employed should do is inform Revenue & Customs of the change in their tax status.

John Whiting at Price Waterhouse Coopers, an accountant, said: “You have to tell the Revenue within three months of becoming self-employed, mainly because the self- employed pay Class 2, rather than Class 1 National Insurance contributions (Nics). Class 2 Nics cost about £2.10 a week, but most self-employed people also have to pay Class 4 Nics, meaning they pay about the same as their employed peers.�

Another sensible step is to consider whether to register yourself for Vat. Self-employed people earning £61,000 or more a year have to do this, but those earning less can choose not to.

Whiting said: “People who are registered for Vat can claim that back on their expenses, which is an advantage. However, registering may not be the best option. Journalists might choose to register for Vat because the companies they are billing can claim the Vat back. But hairdressers would probably not want to register because they work for individuals, for whom Vat simply bumps up the price.�

When it comes to income tax, self-employed people pay the same rates and benefit from the same allowances as employees. But they have to pay the full amount owed in two instalments, made in January and July. One common mistake is not putting enough money aside.

Whiting said: “Remember to save some of your profits to pay in tax. Lower-rate taxpayers should save about £30 of every £100 they make, rising to £40 for higher-rate taxpayers.�

You can, however, cut your tax bill by offsetting expenses against it. The Revenue states that anything used “wholly and exclusively� for business purposes can be offset against tax. Qualifying items could include a computer, stationery or use of your home as an office.

The pension regime changes that were introduced on April 6, including the advent of more flexible self-invested personal pensions (Sipps), have made this easier — as has the introduction of low-cost stakeholder schemes.

Philippa Gee of Torquil Clark, an adviser, said: “Historically, fluctuating earnings meant the self-employed could not make the maximum possible regular contributions to a pension because their policies would not allow any variation. With stakeholder plans, there is much greater flexibility.

“I would suggest setting a fairly low monthly investment level and then reviewing it at the end of each year to see whether they should make a lump-sum payment.�

As well as setting up a pension, advisers also recommend that the self-employed put aside money for a rainy day.