How to Manage Your Taxes as a Self-Employed Consultant

If self-employment is new to you, it can be difficult to know where to start and what it all means.

Here I show you how to get started as a Self-Employed Consultant, unravel some of the confusion around taxes and to help get you prepped for doing your first tax return.

What is Self-Employment

Self-employment means that you work for yourself rather than for someone else. This means you:

  • Are responsible for finding your own work;
  • Work out how much you should charge your clients;
  • Need to have your own method of transport, mobile phone and equipment;
  • Invoice for your work and offer your clients at least one way to pay you;
  • Will not receive sick pay or holiday pay, so you will go without earnings during these times;
  • Make sure you have the right qualifications to operate;
  • Take out your own insurance;
  • Need to register as self-employed, work out your own taxes and send a tax return to HMRC.

You are not restricted to just being self-employed either. You can hold down an employed role as well as doing your own thing on the side.

What Taxes Do You Pay as a Self-Employed Consultant

You will need to pay Income Tax and 2 types of National Insurance on your earnings.

Learn More: Tax and National Insurance When You’re Self-Employed (+ Free Calculator)

Earnings mean all the money you are paid as a Consultant less expenses and other allowances you are entitled to.

Anyone who is self-employed must register with HMRC and declare their earnings. Earnings may be tax-free because you earn below the personal allowance, however, you still need to declare everything to HMRC on a self-assessment tax return form.

There is one exception however.  

You only need to register and pay tax on your self-employment income if you earn more than £1,000 in a tax year.

A tax year runs from 6 April to 5 April.

If you make less than £1,000 as a Consultant then it’s tax-free and you don’t need to declare it.

Useful if you wanted to just test out life as a Consultant or just earn a small amount on the side.  

This perk is called the HMRC Trading Allowance.

When to Register as a Self-Employed Consultant

Officially you should register by 5th October in the second tax year of being an Consultant.

So if you became a Consultant on 1 April 2018 then you would need to register as self-employed by 5th October 2018.

Allowable Expenses for Self-Employed Consultants

One of the perks of being self employed is that you get to set off costs against your income.  This reduces the amount of tax you have to pay.

There are rules set out by HMRC which expenses you can claim for (allowable expenses) and those you can’t (disallowable expenses).

In the main anything, you need to pay for in relation to working as a Consultant will be allowable or “tax deductible”.

Here are some typical allowable expenses:

  • Computer & printer;
  • Business cards;
  • Website;
  • Marketing or paid advertising;
  • Office rent;
  • Phone and Data;
  • Travel to clients when you use a taxi, tube or bus;
  • Insurance;
  • Training to keep your skills up to date, along with incidental travel and food costs or overnight stays;
  • Accounting & bookkeeping;
  • Bank charges for a business bank account.

There may be expenses you pay for that you use personally, like your mobile phone. In these cases, you can only claim a portion as an allowable expense.

So if you use your mobile phone for 60% work and 40% personal, then you take 60% of the total costs to put against your taxes.

Disallowable Expenses for Self-Employed Consultants

After years of people pushing the boundaries and claiming for some questionable expenses, HMRC have a growing list of expenses that are disallowable.

These include things like:

  • Parking fines;
  • HMRC penalties and interest;
  • Non branded clothing;
  • Training for new skills;
  • Travel to your base of work;
  • Lunch, unless in special circumstances;

Bookkeeping and Record-Keeping When You’re Self-Employed

One of the keys to reducing your tax bill is to stay on top of your bookkeeping and tacking all your expenses.

You’ll also need to make sure you keep all your receipts support all the expenses you want to claim, as well as details of what you have been paid.

The simplest way to do this is to:

  1. Open up a separate bank account for yourself and set this to send/receive any payments. That way when tax time comes you have a record of everything that has happened.  
  2. Save all your receipts and reports using a bookkeeping app.

Quickbooks is a great option for self-employed consultants since you can photograph and store your expenses on the go, as well as using the app to automatically track your business mileage.

Anita Forrest
About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - a UK small business finance blog where she shares help and advice with the self-employed community to make topics like registering a business, bookkeeping and taxes easy to understand.