This piece first appeared in Saga Magazine in March 2008
The text here may not be identical to the published text

 

Working for yourself

self-employment beckons

As we get older self-employment becomes more tempting. Partly to bring in extra money but also because employers – despite laws against age discrimination – are less open to recognising our talents. So working for ourselves, especially working from home, seems much more attractive. Some people retire when they are still young and have plenty of energy and feel the skills they used at work are being wasted in retirement. Others are drawn into self-employment through the online auction sites. What begins with selling off unwanted Christmas presents or duplicates in your collection of knitting patterns can soon turn into a small business.

If you just sell things you have owned for a while or books you have read and no longer want then you are not self-employed. Nor is an artist who just sells the odd picture. But if you start buying things with the intention of selling them or you paint pictures or write articles specifically to sell, or you set out to sell your services in any field than you are self-employed. It doesn’t matter how little you make – even nothing at all – if you intend to trade and make a profit then you are self-employed.

Register
The first thing to do is register as self-employed. You have three months to register from the end of the month in which you start being self-employed. If you miss that deadline there is a £100 fine. And if you delay past 6 October in the tax year after the one in which your self-employment started you could face further penalties. You register by calling the Revenue’s Helpline 08459 15 45 15. You will need your National Insurance number – find it on an old payslip or pension form – and you will be asked for the name of your business. If you haven’t got one just give your own name. You can always change it later. Call the same number with any question about being self-employed.

National insurance
As a self-employed person you may have to pay two sorts of National Insurance contributions. Class 2 contributions are £2.85 a week (£2.95 from April). You can arrange to pay them by direct debit. If you make a profit of less than £4635 (£4825 in 2008/09) then you can avoid paying them by applying for what is called ‘small earnings exception’. But if you need the contributions to get a full state pension
, class 2 contributions are a much cheaper way of doing that than paying class 3 voluntary contributions (£8.10 a week from April) to fill the gap later.

If you make more than £5225 profit (£5435 in 2008/09) you will also have to pay class 4 contributions. They are paid with your income tax when you do your self-assessment form. They are 8% of your profits between that threshold and £34,840 (£40,040 in 2008/09) and 1% on profits above that level.

Once you reach pension age (60 for a woman, 65 for a man) National Insurance contributions no longer have to be paid. Your last Class 2 contributions are due in the week before your birthday. Class 4 have to be paid in the whole tax year in which your birthday falls but not after.

Self-assessment
As a self-employed person you will be responsible for working out your profit and you will be sent a self-assessment form. If your turnover is less than £15,000 you will only need a simple statement of your income and expenditure. Above that you will have to fill in the whole self-assessment form which includes extra self-employment pages. It is much easier to do it online if you can. The deadline for filing the paper form which arrives in April is now 31 October. But if you do it online you get another three months until 31 January. If you miss the deadline there is an automatic £100 penalty (though that is reduced if the tax you owe is less than £100). Register for online self-assessment at
www.hmrc.gov.uk. The process is a bit fiddly – you will be sent a password by post which you must go online and confirm within 28 days or it will expire.

Tax has to be paid in two instalments – 31 January and 31 July. If you’ve been used to paying your tax each month through PAYE finding it in two lumps can come as a shock. So make sure you put aside a proportion of your income to cover the tax bill in a separate account that you never touch. If your income is modest, a quarter of it should be plenty. But if you are likely to pay higher rate tax a third or more is safer. It is better to have too much than too little when you have to find the tax!

Profits
Your profit is of course the money you are paid minus the expenses incurred in running the business. But working out the expenses can be tricky.

Whenever you are out on business or ordering things from home remember to get and keep a receipt for every expense from bus fares to paper for the printer. If you run a car which is partly used for business make a note of the business mileage and the private mileage. Work out the proportion of business use and then apply that to every expense of running the car – insurance, breakdown, servicing, and petrol. If you have a loan to buy the car then charge a proportion of the interest on that.

If you work from home you can charge a share of the cost of electricity and gas. If you work in one room and there are five rooms altogether you charge a fifth to the business. When you count the rooms leave out any bathroom or toilet. You cannot charge a share of your water bill (unless you have a meter) nor of the cost of repairs to the property. You can charge a share of the council tax and any interest you pay on the mortgage - but not the capital repayments. Beware of using one room exclusively for your business. If you do then Capital Gains Tax may be due when you sell your home. It is much safer to let the room have an alternative use as well – perhaps keep a sofa bed in there for guests, use it for sewing or laundry or make sure the computer is used for playing games or personal letters and e-mails.

You can also charge a proportion of your phone bills. Work that out over three months taking a note of calls and seeing what proportion of the cost is business related. Once you have worked out the proportion apply that to the total cost of your phones. Keep it – and car usage – under review as your business grows.

If you buy capital items – a new computer, a telephone system or a filing cabinet – from April 2008 you can simply charge the whole cost as an expense in the year it is incurred as long as the total spent in a year is less than £50,000 – called an Annual Investment Allowance. Cars are outside this scheme. Normally you will be able to set just 20% of the capital value of the car against your tax in the year you buy it (remember that the capital cost has to be reduced by the proportion that is for private use) and 20% of the balance in subsequent years.

VAT
If your turnover – the money you take in – exceeds £64,000 a year you must register for VAT. That means you have to charge VAT on the goods or services you sell. However, some things are exempt or have a zero rate of VAT. In particular books are exempt and second hand goods have a special scheme which means very little VAT is due. If your turnover is less than £150,000 excluding VAT consider the flat-rate VAT scheme – it simplifies and often reduces the payments due.

More information at www.workingforyourself.co.uk which is run by HMRC but is much friendlier than its regular website at www.hmrc.gov.uk.

 


All material on these pages is © Paul Lewis 2008