I’ve updated this guide on 10 November 2020
I put together this tax guide for self-employed consultants because as a Chartered Accountant in my previous life, I know how confusing business registration and taxes can be when you work for yourself. In this guide, I’ll share some of my knowledge not just about business registration but also VAT, tax deductions and returns, as well as where you can find additional information to read to help build your knowledge.
How to Register as a Self-Employed Consultants
The quickest and easiest way to register to work for yourself with HMRC is to apply to be self-employed. You’ll need to do this once your income (not profit) goes over £1,000 during a tax year (6th April to 5th April). You’ll need to make sure you’ve registered by the 5th October following the end of the tax year you went over the £1,000 threshold.
Even if you are currently not making much money in profit but have crossed the £1,000 income threshold, you must still register with HMRC and complete a tax return. Although this may feel onerous, completing a tax return means you can record all your expenses to create a tax loss. This can then be used against any money you make in the future and save you tax at this point.
There are other business structures out there including:
- Limited Company
These may offer you better tax-savings depending on your earnings and protection from creditors, but they often carry more reporting responsibilities meaning you need to engage an accountant.
For the rest of this guide I’ll assume that you are registered as self-employed.
How to Calculate Your Tax
The amount of tax and national insurance you’ll pay will depend on how much money is left over after deducting expenses, tax allowances and reliefs.
Income tax starts at 20% on all your income (not just from consulting) over £12,500 and 40% over £50,000. Class 2 national insurance is paid as a set weekly amount when your earnings go over £6,475 and Class 4 is worked out as 9% on your earnings over £9,501.
When you fill in your tax return online, HMRC will automatically calculate how much tax you owe for you based on the information you enter.
Tax Deductions for Self-Employed Consultants
Claiming for allowable business expenses is the easiest way to reduce your tax bill when you’re self-employed. Typically most of the things that you pay for in your business will be tax-deductible, for example:
- Website design & build
- Web hosting
- Licences, software and subscriptions
- Training and courses
- Use of home as an office
- Travel and mileage
- Legal fees
- Accountants fees
- Bank charges for a business bank account
There may some expenses you pay for that you use personally and for business, like your mobile phone. In these cases, you can only claim a portion as a business expense. So say you use your mobile phone for 60% work and 40% personal, then can claim 60% of the total bills to put against your taxes.
Whilst most things you pay for as part of being a consultant are tax write-offs, there are some things you may pay for that you cannot deduct against your taxes. This includes things like:
- Fines and penalties eg: parking fines
- HMRC interest and penalties
- Training and courses for new skills
- Food, except in certain circumstances
- Personal expenses
Tax Returns for Self Employed Consultants
As a self-employed consultant, you’ll need to follow the rules of HMRC self-assessment. You’ll need to submit a tax return online declaring your income and expenses once a year by 31 January, as well as paying tax twice a year by 31 January and 31 July.
Keeping Tax Records
As a self-employed consultant, you’re legally required to keep records and paperwork that support all your income and expenses and hold onto them for 6 years. That way if HMRC ever asks how you arrived at the figures on your tax return, you’ll be able to show them evidence.
Your records include things like receipts from clients and receipts for any expenses you may wish to claim, along with bank statements.
The simplest ways to keep your records in order and speed up filling in your tax return is to:
- Open a separate bank account so all your payments are in one place and help you budget for your tax bill (take a look at Starling);
- Store your records and paperwork using a secure cloud-based storage system like google drive or Dropbox;
- Set aside time on a regular basis to check all your finances are in order and do your bookkeeping.
Value Added Tax (known as ‘VAT’) is a tax added to the price most goods and services consumers buy. Only businesses with a turnover of £85,000 or more are required to register for VAT. Once VAT registered, a business must charge VAT to its customers at the right rate and pay this over to HMRC after deducting any VAT they have paid to their suppliers as well as submitting VAT returns, usually quarterly.