Tax advice for setting up a new business

According to Luke Johnson, one of Britain’s most successful entrepreneurs and the author of Start It Up, “Running your own business is easier than you think”.  But what happens if, like many people you are a little cautious about trading in your current job and taking the plunge? What if, instead, you want to keep working for your current employer whilst running your own business on the side?  If so, there are some considerations and future actions you need to be aware of in respect of tax.

 

So let’s tackle what you need to consider for the self-employed part.

Firstly you need to decide what type of business you will be.  This is important as the decision you make will determine what and when information needs to be submitted to HMRC. 

For the advice below, I have assumed an individual would look to start their business as a sole trader.  There are, however, a number of different types of business depending on your circumstances, such as a Limited company or perhaps a business partnership.  A sole trader doesn’t mean you couldn’t employ someone and must work alone, it just means you are responsible for the business and are personally responsible for any losses your business makes and liabilities it incurs.

From a tax perspective you will need to report your income received via a self-assessment form each year, pay income tax on any profits your business makes and pay National Insurance.

As a sole trader your key responsibilities are:

  • Register with HMRC and the advice is to do this as soon as possible after starting the business, but at the latest, you should register by 5 October in your business’s second tax year
  • Keep records of your business’s sales and expenses
  • Pay income tax on your profits and National Insurance.  As the Chancellor announced in Budget 2016, Class 2 National Insurance for the self-employed will be abolished and only Class 4 will be payable. It is expected this change will take effect from April 2018.  This is to simplify the National Insurance system;
  • Your business debts - the paying of bills for anything you buy for your business
  • Registering for VAT if your turnover reaches the VAT threshold of £85,000 (2017/18 tax year)

 

How do you register?

You should always aim to register online as its much quicker and less hassle. How you register will depend on whether you are a new sole trader who hasn’t sent in any tax returns before or not. 

Not sent in a return before

Previously sent in returns

 

Your employment

There is no reason why you shouldn’t retain your current tax code but will depend on where your highest income comes in from.  Often, certainly to start with it will most likely be your employment income as it may be higher than your new business profits, especially if on the normal personal allowance tax code and earn over the tax threshold, currently £11,500pa (2017/18 tax year).

However, your tax code might change when you submit your businesses profits via the self-assessment form.  If you owe HMRC less than £3,000 on your tax bill and you submitted your paper return by 31 October or online by 30 December then HMRC should recover the tax due back via your employment tax code.  The following conditions must be met to have tax recovered in this way:

  • You have sufficient income to collect the tax
  • You won’t end up paying more than 50% of your pay in Income Tax (payroll systems would prevent this)
  • You wouldn’t pay more than twice as much tax as you normally do (50%)

HMRC calculates your adjustment for the tax code by diving what you owe into 12 equal monthly instalments starting from the next tax year.

Adjusting your tax code is the normal route HMRC use for recovering underpaid tax, but if you specifically ask them not to use this method then you will need to pay your bill via other methods e.g. through a one off payment to HMRC.

 

Employment contract

Just as an observation, if you plan to set up a new business then check your employment contract.  Your employer may have included a clause that prevents you working for someone else and or setting up your own business.  Clearly they wouldn’t be happy if you were setting one up in direct competition!

 

You can set up on your own, or with employees, but you need to decide what type of business you will be; you can change the type at a later date but there will be tax consequences, so seek advice.  As a sole trader you will report your income and profits by way of a self-assessment return.  HMRC will link your employment and your business income records to ensure you pay the right amount of tax.  This might be via your tax code, or via other payment methods, depending on the amount owed and your choices. Remember too, if your business becomes successful and you need help; a whole new world will open up when taking on employees; seek advice.

It just leaves me to say, if you decide to embark on a new idea and start your own business; all the very best of luck!

You can find more information on starting a business and the tax obligations via https://www.gov.uk/business-legal-structures

If you would like more advice regarding to tax and starting a new business, please contact our tax team

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