Thinking of starting out with self-employment but not sure what comes next? Here are some accounting basics to help you.

by | Nov 25, 2021 | Articles

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Whether you’re hoping to make a little extra cash on the side, launch a passion project or switch to freelancing full time, taking the first step into self-employment can be really daunting – not least because, if you’re used to working for an employer, the accounting side of things seems very complex. To answer your questions, we teamed up with accountancy software Osome:

Should I be registered as a sole trader or a ltd company?

It depends on which stage of your business you’re at. If you have just started then remember that if you only made less than £1,000 from 6th of April one year to 5th of April the next, you are not required to register for tax or self-assessment. As soon as you reach £1,000 earned,  you’ll need to register yourself as a sole trader. In the early stage, sole trader might work out better as it is less complex and easier to navigate. It’s also more private than a limited company, tax filing can be done more easily and cheaply and filing deadlines are set and the same for everyone.

A limited company will be more beneficial in the growth stage of your business. Benefits of a limited company are that it could be preferred by lenders, investors and other stakeholders, it can be more tax efficient and it provides you with protection as it acts as a separate legal entity. You are not personally held responsible for business debts (as long as there is no intentional fraud found).

How do I set up my side hustle and navigate tax alongside existing employment?

You are taxed on all of your income combined. For example, if you are working in an employed role, you are taxed on a monthly basis when you get paid, using PAYE (Pay As You Earn). For your side hustle, you keep your gross profit and only have to declare your income once a year, most commonly through self-assessment. What happens is that when you do your self-assessment, you have to declare all of your earnings in that year and your £12,500 personal allowance is accounted towards your total income, then you pay tax on the rest according to how much you have earned in total. For your side hustle you are only taxed on your net income. This is your sales minus your expenses.

How do I plan for tax as a self-employed person?

You are taxed on your earnings between 6th of April to 5th of April of the year, and this is normally due on 31st of January of the next year, although as you earn more you may have to make ‘payments on account’ in January and July, too. There are two main taxes – a proportional tax on your net profit and then national insurance on top. Planning depends on how thoroughly you like to do your bookkeeping. Doing it on a monthly basis will help you to see your net profit on a monthly basis too, and all you have to do then is keep your tax aside every time an invoice is paid, and once payment is due you will already have the fund saved.