Taxation
Registration
It is very important to advise the tax authorities that you have started in business as soon as possible - even if you already fill in a tax return each
year. If you do not tell them within three months of the end of your first month in business you could face a penalty.
Once you are registered as self-employed, you will be a self assessment taxpayer. You will have to fill in a tax return each year and give details
of your earnings and any other income you get. This information is used to work out how much income tax you have to pay.
Your local tax office should automatically send you a tax return every year in April. If you send your completed return back to your local tax office by 30th
September in the same year, the tax office will calculate your income tax bill for you. You should certainly submit your return by the following 31st
January at the latest.
If you do not, there is an automatic penalty for late filing of £100.
''Tax is not taxing.....
...........but only if you are a client of Penn Accounts''
National Insurance Contributions
Class 2 National Insurance Contributions
Every self employed person must pay Class 2 NIC's. These Class 2 NIC's are your contribution to the State coffers. They allow you to receive
certain state benefits should you qualify for them in the future such as a state pension, maternity leave and bereavement benefit.
You pay Class 2 NIC's at a flat rate of £2.10 a week (2005-2006) if your earnings are above £4,345 per year. (You can choose to make your payments
either quarterly or by monthly direct debit.)
Class 2 NIC's do not count towards the additional state pension, statutory sick pay or jobseeker's allowance, so you might want to think
about making other arrangements like a personal pension and income protection insurance. Contact our Pensions Team in our sister financial
services practice Penn Financial for further free advice and assistance in this regard.
You can register for class 2 NIC's when you register as self-employed with the tax office.
Exceptions to Paying Class 2 NIC's
If you earn less than £4,345 per year you can apply for a 'certificate of small earnings exception' and not pay class 2 NIC's. However, you might
decide to carry on paying them voluntarily to keep your entitlement to the state pension and other benefits.
Class 4 National Insurance Contributions
Every self employed person is also obliged to pay Class 4 NIC's. Class 4 NIC's similar to a tax on your income in the same way that income tax is a tax on
your income. You must pay Class 4 NIC's and they do not confer any immediate direct benefit but they are (in theory at least) your contribution to
State services such as the NHS etc.
The amount of class 4 NIC's you have to pay for any tax year is based on your profits for that year. You pay eight per cent on annual profits
between £4,895 and £32,760 and one per cent on any profit over that amount.
You work out your class 4 NIC's on your tax return and pay them alongside your income tax. Class 4 NIC's do not count towards benefit entitlements.
Value Added Tax (VAT)
If your business turnover is more than the VAT threshold (£60,000 from 1 April 2005) you may have to register for VAT. Even if your
turnover is below the threshold it might benefit your business to register voluntarily. Penn Accounts will advise you which course of action is the
best for you and your company in order to minimise the tax payable.
VAT Return
A VAT registered business usually has to charge VAT at a set rate on its sales, but it can usually recover VAT on its purchases. However there are many
exceptions to this simple rule.
When you register for VAT you will usually be given a three-monthly 'tax period'. HMRC will send you a VAT Return towards the end of each tax period.
You are required to submit the following details on this Return:
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The Return must be signed, dated and submitted by the due date. This is one month after the date of the return. When you are then required to
make a payment or request a refund, depending whether your sales tax exceeds your purchases tax or the other way round.
The completion of your VAT return is not a simple matter and you are strongly advised to seek professional assistance. We recommend that you let
Penn Accounts prepare and submit your VAT returns.
We will ensure that your VAT returns are properly completed and submitted within the required time so that you do not pay penalties or interest. We will also make
sure that you are claiming the right VAT on your sales and of course just as important, that you are claiming all the VAT back on the purchases you have made to
offset against your sales.
The amount of your sales in the period
-The amount of your purchases in the period
-The tax you have charged on your sales
-The tax you intend to recover on your purchases