The art of taxation for freelancers

Simon Peters FCCA
Simon Peters Associates Ltd
simon@petersassociates.co.uk
Peters Associates Ltd www.petersassociates.co.uk

Overview
 Reasons for declaring income & paying tax
 Most common business structures for freelancers
 Sole trader – overview
 Company – overview
 Sole trader v company
 VAT issues
 Expenses – what’s allowable and what’s not ?
 Record keeping/accounting software

Reasons for declaring your income ...
 Legal requirement – penalties up to 100% of tax due
plus interest if you don’t and are then found out
 Provides a record of your income – for mortgages, rent
references
 State benefits – pension, working family credits
 Credibility with clients – may require you to operate
through Ltd or provide UTR number

Most Common Freelancing Structures
In increasing order of complexity ……
 Sole trader (2.8 million registered 2011)
 Partnership – two of more sole traders (450,000)
 Limited company (LTD) (1.3 million of which half have
no employees apart from director)
 Limited liability partnership (LLP) – hybrid of
partnership and company (less than 100,000 ?)

Sole trader – trading under your own name
 Register with HMRC within 3 months of
commencement
 File tax return and pay tax 10 months after end of tax
year
 Start trading 1 May 2013
 First tax period 1 May 2013 – 5 April 2014
 File return by 31 January 2015
 Pay tax by 31 January 2015 (so nearly 2 years
later)

Sole Traders – income tax
Income tax on profits –
0 - 9,440 (PA) nil
9,441 – 41,450 20% (32,010)
41,451 – 159,440 40% (117,990)
159,440+ 45%

Sole traders – national insurance
Class 4 NI on profits
0 - 7,775 nil
7,776 – 41,450 9% (33,675)
41,451 + 2%
Class 2 NI flat rate of £2.70/week – usually pay by DD

Taxation calculation – assume no other income
Fees £60,000 (May 13 – April 14)
Expenses £10,000
Profit £50,000
Income tax National insurance
9440 @ 0% 7,775 @ 0%
32,010 @ 20% = £6,402 33,675 @ 9% =£3,030
8,550 @ 40% = £3,420 8,580 @ 2% =£172
Total = £9,822 Total =£3,202

Taxation calculation
 Total liability for 2013/14 £13,024 due 31 Jan 2015
 Plus payments on account for 14/15 of 50% of previous
year liability (if over £1,000)
£6,512 31 Jan 2015
£6,512 31 Jul 2015
 Importance of budgeting for tax payments
particularly in the first year

Company - Administration overview
 Register company – cost £13 using companies house
online formation or use formation agent/accountant
 Must have unique name
 Need at least one director
 Registered office
 Shares – usually 100
 Company bank account
 File accounts 9 months after end of the year – heavy
fines up to £1,500 if late/struck off
 File annual return – directors, shareholders etc

Company – taxation overview
 Corporation tax at 20% (historically low)
 Payable 9 months after end of the accounting year. This depends
on date of incorporation –
Incorporate 1 May 2013
End of year 31 May 2014
Tax due 28 Feb 2015
 Optimum tax strategy is small salary below NI threshold 2013/14
this is £640/mth or £7,680/yr take the rest as dividends –
 No National Insurance on dividends. No personal tax if
dividends don’t exceed around £30,000/yr.

Company v Sole trader comparison
Company Sole trader
More complex to register & administer Simple to register & administer
Certain company details available to the
public
All details are private
Need to file annual accounts with both
Companies House and HMRC and Director’s
personal tax return and payroll
Only need to file personal tax return
Almost certainly need accountant due to
complexity of filing requirements, fees £700-
1500/yr
Accountant not necessary if affairs are
simple, fees £200-600/yr
Limited liability – so creditors cannot come
after directors in insolvency
Personal liability for business debts
Greater credibility /prestige Lower credibility/prestige

Company v Sole trader comparison
Company Sole trader
Ownership can be transferred/sold by
transfer/sale of shares
Ownership not transferrable – assets can be
sole separately
Losses can only be used against future or
past profits of the company
Losses can be used against other personal
income – useful if you have other sources of
income – salary and expecting to make a loss
in early years
Lower overall tax rate – 20% no NI Higher overall tax rate – tax 20% NI 9%
Directors take money as mixture of salary
and dividends. Personal tax based on
amounts taken not company profits – so
more scope for tax planning
Owner (self) takes money whenever they
want – personal tax on profits not drawings –
so less scope for tax planning

Company v sole trader tax comparison
Annual Net
profit
Company tax Sole trader tax Difference
10,000 461 454 -7
20,000 2461 3354 893
30,000 4461 6254 1793
40,000 6461 9154 2693

VAT issues
 Requirement to register when sales exceed £79,000 over any 12 month
period or voluntarily at any point
 30 days to register. Registration with effect one month after month you
go over the limit
 Exceed limit in May 2013
 Register from 1st July
 File returns every 3 months
 If your clients are vat registered themselves - large businesses, then it
won’t matter to then if you add vat as they will be able to claim back.
Consider voluntary registration to reclaim vat on expenses
 Flat rate scheme – amount to pay based on percentage – often
beneficial to register
 If clients are members of the public or non-vat reg small businesses
then they won’t so will add 20% to cost to them – you may have to
reduce your margins

VAT registration - problems if your clients aren’t
vat registered
Pre- registration Post-registration
maintain sale
price
Post-registration
maintain profit
Selling price 120 120 incl vat
100 net vat
132 incl vat
110 net vat
Cost of sales 60 60 incl vat
50 net vat
60 incl vat
50 net vat
Net profit per sale 60 50 60
Vat paid over 0 20-10 = 10 22-10=12

Expense – allowable or not ?
Type of Expense Sole trader Company
Travel – train, bus, taxi etc Business travel – yes
Commuting between home
and office – no
Temp workplace yes up to
24mths or 40% of week - yes
Business travel – yes
Commuting between home
and office - no
Temp work place yes up to
24mths or 40% of week - yes
Travel - car Yes – claim either actual
running costs less private use
percentage or mileage
Yes –mileage only 45p/25p
per mile
Entertaining Client – no
Staff – yes up to £150/yr
Client – no
Staff including directors
£150/yr
Working from home
expenses – rates, rent,
mortgage interest, light, heat
Yes – either flat rate £4-
£15/wk or detailed
calculation
Yes – flat rate £4-£15/wk or
rental agreement with
director

Expenses – allowable or not ?
Type of expense Sole trader Company
Meals, coffee etc Yes if working away from
normal place of business
Yes if working away from
normal place of business
Smart phones Yes but deduct percentage
for personal use
Yes allow all
Childcare Not at present – changing
from 2015
Yes – up to £55/wk
Training Yes – provided
updating/refreshing existing
skills not acquiring new ones
Yes – provided
updating/refreshing existing
skills not acquiring new ones
Pre-trading expenses Yes – up to 7 years prior to
trading
Yes – up to 7 years prior to
trading

Record keeping & accounting software
 Requirement to keep records for 6 yrs – penalties up to
£3,000
 Copies of bank statements, sales invoices, expense
invoices, payroll, vat returns
 Electronic copies are ok
 Use of bookkeeping software recommended –
spreadsheet, VT Cashbook (free/excel based) , Xero,
Free agent (subscription/cloud based), Sage (annual
licence - large businesses)

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