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Frequently Asked Questions

Thursday, September 3, 2015
Frequently Asked Questions

? Frequently Asked Questions ?

Here are some of the most frequently asked questions.  If you have any additional questions you'd like answering please do not hesitate to contact me.

When do I need to register as self employed?

You need to register by the 5th October following the tax year you started trading in.  For example, if you started trading in the 2014/15 tax year, you need to register by the 5th October 2015, and if you started trading in the 2015/16 tax year, you need to register by the 5th October 2016.

When is the tax year?

The tax year runs from the 6th April one year, to the 5th April the following year.

What expenses can and can't I claim?

Have a look at my handy guides for employees, self employed and partnerships, and limited companies.

What is the difference between Class 2 and Class 4 National Insurance?

Both are for the self employed.  Class 2 is calculated on a weekly rate and historically was paid monthly or 6 monthly.  Class 4 is based on your profits.  From tax year 2015/16 both will be assessed and need to be paid as part of your tax return.

Do I need a separate bank account?

When you are self employed you don't need to have a separate account, it is perfectly acceptable to use your normal personal account.  However, it is good practice to open a separate account for your business, as it will keep your business income and expenditure separate making it easier to keep track of everything.  You can easily transfer money from your business account into your personal account for personal expenditure, this is called drawings.  Most banks offer up to 2 years free banking for new business accounts.

If you are a limited company you will need to have a separate business account.

What are the current tax and national insurance rates and allowances?

All current rates and allowances can be found here.

What are the key dates for tax returns?

  • 31st July following the end of the tax year if required for Tax Credit purposes, or to reduce the 2nd payment on account
  • 31st October following the end of the tax year for paper returns
  • 30th December following the end of the tax year for online returns to collect tax through PAYE codes, where you owe less than £3,000
  • 31st January following the end of the tax year for online returns

What is a Payment on Account and why do I need to pay it?

If the tax you owe is over £1,000 HMRC will ask for a Payment on Account for the following tax year too.  There are two payments on account, each totalling half of the tax due for the previous year.  

Therefore when you complete your return you'll be asked to pay the tax owed for the year on the return, plus the first payment on account for the following year (also due by the 31st January).  You will then need to pay the remaining payment on account by the 31st July.  

If when you do your next tax return there is any extra owed this will be due by the following 31st January along with your tax return - this is called the balancing payment.  

If when you do your next tax return there is less tax to be paid you can either reduce your 2nd payment on account if the return is filed by the 31st July, or you can request a refund, or put toward the next year's tax due.

I have until the 31st January to complete and file my return, why should I do it early?

Simply because there are benefits to getting it done early:

  • it's out of the way, meaning less stress
  • everything is still fresh in your mind
  • if you're due a rebate you will get it earlier
  • you could reduce your second payment on account
  • you don't need to make the payment until the 31st January so gives you plenty of time to save if needed or budget accordingly
  • plenty of time to sort out any logging on/UTR/password queries

Have a read of my blog on getting your tax return done early here.

What paperwork do I need to keep and how should I organise it?

You will need to keep copies of all your sales invoices, purchase and expenses receipts, bank statements, payroll records (if you're an employer).  You can either keep paper copies or electronic copies, as long as you can print the electronic copies should they be needed for an inspection.  You could do something as simple as a C4 envelope, one for sales, one for purchases, and one for bank statements for each month.  Or you could set up a folder similar to the one below.  If filing electronically it would be best to have folders for each year, then each month, then split these into sales, purchases etc.  There are many different apps now available allowing you to scan receipts etc which are very handy.


Should I use a spreadsheet or accounting software?

Either or are fine to use, which ever suits you best.  I can supply a template for a spreadsheet upon request.  There are also many great software packages now available, mostly cloud based.  Unless you are a large company there is no need to purchase a desktop package like Sage.  Sage do a cloud based version, but my personal favourite to use is Xero.  As with Xero many packages can be used via a web browser or via an app.  They can also be linked to your bank and paypal accounts so you can see all of your transactions from your software.  Xero is able to produce invoices which link to your paypal account and other online payment options, so when you email out an invoice it has a pay now button which takes you directly through to pay via debit/credit card or paypal.  This can be very handy and save you a lot of time.  You would then also see the receipt in your bank feed and reconcile it straight to the invoice.  This is a great way to keep track of who has and hasn't paid you.  You can also scan receipts directly into your software via your app and save it here.  If you'd like me to send you a spreadsheet template or would like a free 30 day trial of Xero please contact me.

What do I need to include on my invoices?

This great infographic from Free Agent explains everything you need to include on your invoices.  If producing invoices from software packages these should all automatically be included.

Invoice Template

VAT Invoice Template

When does income count in my tax return - when I invoice or when I am paid?

If you are using the cash basis then when you receive the money from your client.  The most common way to prepare accounts is by the accruals method.  By this method it counts as income when you supply the goods or complete the work.  Therefore you should ensure you invoice your customer and request payment as soon as possible once you supply the goods or complete the work.

Sould I be self employed or set up a Limited Company?

There is no straight forward answer to this question unfortunately.  It will depend on your individual circumstances.  Depending on your level of profits it could be more tax beneficial to become a limited company, however with a limited company comes higher accountancy fees due to the additional work involved.  I would be able to give you a full comparison if required to see which option would be more tax beneficial.  

In addition to the tax implications you would also need to take into account the legal form and other aspects.  

Being a sole trader there is no discinction between you and your business - you are your business.  All the debts relating to your business are therefore your debts.  If the assets of the business do not cover the debts your personal assets could be used to pay the debts - including your house.  You don't need to have a separate bank account (although I do recommend it for good practice), and you rely on your own personal credit rating to borrow money.  It is also generally assumed that you are a 'one man band' and possibly less credible.

If you were to set up a limited company the company is a separate legal entity.  The debts of the company belong to the company.  Personal assets are not used, except in cases where a personal guarantee has been given.  Your loss is limited to hte amount you invested in the company - therefore your home is not at risk.  You will need a separate bank account, and the company can establish it's own credit rating against which to borrow money.  Limited companies are also ofted seen as more credible.

I'd recommend talking through which option is best for you with either myself or another accountant before you make a descicion.

What is the differenct between a partnership and an LLP?

An LLP is a Limited Liability Partnership.  The difference is very similar to being either self employed or a limited company, just as partners rather than on your own.  An LLP is very similar to a limited company.


I hope this has answered your questions.  If you have any further questions or would like to discuss any of the above questions in further detail please do not hesitate to contact me.