Paying Tax on Self Employed Income & Online Businesses
If you’re looking for ways to make a bit of money during your time as a student give yourself a big pat on the back. Don’t forget however that just because you’re a student, it doesn’t mean that you’re tax exempt.
There seems to be a myth handed down from one generation of students to the next – the myth goes a little something like: “students don’t pay tax”. This is untrue, if you’re earning over your basic personal tax-free allowance you must pay tax and National Insurance contributions, regardless of whether you’re a student or not. It’s worth mentioning at this point that students are exempt from paying council tax – so make sure you get in touch with your local council to inform them of your exemption.
Becoming self employed
Whether you start a business selling electronics you’ve imported from the far East, or you start a business as a freelance writer, it’s really important to register as self employed. Not so long ago there was a three month cooling off period in which you had the opportunity to register with HMRC (three months from the day you started trading) – this rule no longer applies and you must now be registered as self employed or as another business entity from the day that you start trading – there are no exceptions.
Registering as self employed with HMRC is a really easy task – it can be done through their website. All you’ll need on hand is your National Insurance number. The form to register as self employed can be found here:
After you have registered as self employed it’s important that you start to keep very detailed records of all your business incomings and outgoings. These include invoices you’ve paid to suppliers – invoices you’ve issued to customers, and so on. Keeping track of things can seem like a bit of an impossible task at first, but you’ll soon get into the swing of it, and you’ll soon start getting into the habit of making records. These financial records will be used when filing your tax return each year.
Any personal income that you make over you tax-free allowance, and any profit you make on your business that falls over you tax-free allowance will be taxable at the basic rate of 20%. This rises as you earn more – there are two other tax bands, 40% and 50%.
Incorporating a company
In some cases it might be worth incorporating a limited company for your business. It sounds quite drastic and scary, but in reality it’s not. There are many online company filing services out there – you simply pay a fee (£18) and they’ll register your new business for you with Companies House.
Registering as a limited company does have its perks – the main one being that more suppliers are likely to deal with you – being a limited company brings with it an aura of respectability.
Most people take the decision to register a limited company due to tax reasons – you can legally pay much less tax when running a business through a limited company, as opposed to being a sole trader.
Keeping an eye on VAT
VAT stands for value added tax. When you buy something from a shop, the chances are it will have a VAT levy on it – so you might pay £400 for a new television set, but £80 of that goes straight to HMRC in the form of VAT. As a business owner it’s your job to charge VAT and pass it on to HMRC, if your turnover exceed £77,000 (this figure is frequently changing but is accurate at the time of writing).
A lot of people get confused when it comes to VAT – some people think that VAT only applies to businesses making over £77,000 in profit – this is absolutely not true. Any business with turnover greater than £77,000 must charge VAT – it doesn’t matter how big or small your profit margins are. Another common misconception is that VAT is only something big companies need to worry about – and that sole traders are exempt. Again, this is not the case – if your business’ activities result in a turnover of £77,000 or greater you must become VAT registered whether you’re registered as a sole trader, a partner or a limited company.
Does it all sound a bit confusing? If so, hire an accountant?
One of the best pieces of advice that you can be given at this point is to hire an accountant. Most people think accountants run round in pinstriped suits, and they’re only for big businesses – this isn’t the case. Small businesses can also benefit from retaining the services of an accountant to take care of bookkeeping, tax returns, VAT returns and so on.
At the moment many accountants up and down the country are offering free consultations to prospective clients – so make sure you pop into an accountant and see what they have to say about your business. Accountants can often help you make great savings on tax bills – the money you save in tax will more than cover their fees. Accountants fees do vary so make sure you check with the accountant you’re planning on using before you sign up with them. For sole traders fees can range from just a few hundred pounds to a few thousand pounds. For limited companies fees can range from £500 to £3,000-£4,000 – depending on how much work is involved.
It’s essential that you grab your finances and tax affairs by the scruff of the neck when you start up a business. Later down the line when your business has really taken off, the last thing you want is a knock on the door from the tax man because you underpaid or didn’t pay anything at all in those early years.