tarting your own business can be a fun, exciting and stressful time!
However you do need to remember that working for yourself will be very different to working for someone else. One of the biggest differences between working for someone else and branching out to work for yourself is tax.
Tax and the difference between being an employee and self employed
In the past if you have worked for someone else then you probably have never had to think about tax before. Your employer would usually have had a payroll department and they would have been in charge of deducting tax from your wages before you get paid. If you are self employed then you’ll need to know that there are two types of tax you need to pay. Income tax and National Insurance are both paid to Her Majesty’s Revenue & Customers. You will pay Class 2 National Insurance (a small fixed amount per week) and Class 4 National Insurance which is based on your annual profits.
The 31st January – A date NOT to forget
You will need to pay for your tax on the 31st January following the end of your tax year. However you could find that the HMRC ask for payments on the 31st January and the 31st July each year to go towards your future years tax bill too. So you should be prepared to pay quite a large sum of money in January as you will have the whole of last year’s tax bill as well as 50% of the estimated amount for next year too!
One of the best ways to avoid getting into trouble each year with this is to put a little aside each money to pay for this. If you can put away around 25% of your earnings each month then this is a good estimate of how much you need to pay at the end of the year. Try and get into the habit of doing this every single month, even if it can be tempting not to.
You should make sure that you register as self employed as soon as possible. You can do this online via the HMRC website or by calling 0300 200 3504. Once you have registered it is important that you pay your tax bills one time otherwise you could land in hot water and even be fined for late payment!
Consider Using An Accountant
One of the biggest mistakes that people make when they start working for themselves is that they can do their tax returns themselves. Whilst this is true to some extent you are usually far better off getting an accountant on board and outsourcing this work. By doing this you save yourself lots of time and of course as an accountant really knows what they are doing then they can save you money on your tax bills which is always a good thing. Just make sure that you keep up to date with basic book-keeping throughout the year to make your life and the life of your accountant much easier.