tax costs

[lawrenceots]

Hello!


I'm thinking of setting up a business as a sole trader. Firstly, I've tried navigating the gov.uk web, but it just continuallyconfuses me, so I thought if someone in the wkno here could help, that would be fantastic. So, the situation:

I currently have a full time salaried position which I'm happy with. Pay th usual automatic amount of tax and insurance etc

Now, I want to set up a side business, listed as sole trader. All has to be completely above board etc.

How would I go about doing this and firstly, before I do anything, find out how much I would be taxed? I understand that you don't get taxed for anything under 10k, but I still need to know the right way to go about it so, in summarization:

How much would I be taxed in conjunction with the normal job and this side business
The side business would only be pulling in under 10k per year (at the moment initially)
Best way to go about setting it up and informing the govenerment so I'm all above board etc

Advice much appreciated!

 

[Mr Bump]

rather than sole trader I would consider a ltd company.
you can use an account to set it up or DIY
accounts fees would be approx. £900+vat a year
depending on how much you are earning then depends on how much tax you pay via the ltd company.
your total taxable ceiling to keep it under 20% ish is about 43k

so if you say earn 30k in your full time role you could take up to 13k as a dividend via your ltd company and pay cooporation tax at 20%.

 

[lawrenceots]

I see, is there any way to reduce the 900£ per year, as I could easily record any sales etc that would be going in to it for the accounts the following year? I was told at work that ltd would only be good if it would be over 60k per year? If I combine both normal job and then this job, would only be looking at about an income of 27k ish or so combinesd. So, am I right in that if the second job is still only earning enough to be under the 43k tax banner, the tax would be the same, barely noticeable?

 

[Mr Bump]

If you are a sole trader I believe you cannot take profits as dividends so any money earned would attract the full tax at 20% + NI which would be employers and employees so could be up to an additional 26% that's where you gain with the ltd company.

When you take a dividend you only pay cooporation tax no NI however you are still limited to your personal tax limit of £43k in total to keep under the 20%.

I run my own ltd company and doing all my basic accounts keeps my bill at about 900+vat.
I have seen cheaper fees so you might be able to get it down a bit but a good accountant that understands you and you can pop in and chat to is very valuable.

you will also need a business bank account.

 

[lawrenceots]

I see.. I think I see at any rate! Thanks!

 

[Mr Bump]

Lloyds TSB do free 18 months free business banking but you would need your certificate of incorporation to set this up.

 

[boyfalldown]

I have to admit I think @Mr Bump is wrong. For an additional £10k pa I'd stay a sole trader. Your income tax is just that. Tax on income. Your ft job will continue to pay paye on your behalf and you'll complete a tax return ( or you would have until the last budget) when your sole trader income will be added to your ft income and any tax remaining will be paid By you(or refunded to you if you've made a loss) this refund may be useful in you first year and another reason to stay a sole trader.

You only get one tax allowance which is used across all income streams

 

[JonathanRyan]

If you are a sole trader I believe you cannot take profits as dividends so any money earned would attract the full tax at 20% + NI which would be employers and employees so could be up to an additional 26% that's where you gain with the ltd company.

Also.....as a sole trader you basically earn the money when you earn it. As a Ltd company "you" earn the money when you draw it. It can be an effective way to reduce tax by deferring income (i.e. if you are OK with your current salary, you can leave the profit in your new photography business and draw it when you need it. This might mean that you can pay lower rate tax in 2 different years as opposed to higher rate tax in one.) £900 sounds the right ball park for a ltd company. You could probably do it cheaper with more headaches. But for less than 10K profit that's probably overkill unless you are close to higher rate tax band from your PAYE.

If you are sole trader you "simply" add your photography profit to your PAYE income, figure out what tax rate applies and pay the extra. It's about 4 boxes on a tax return BUT the 10K thing is a myth - you are already using that up in your PAYE job.

Bottom line: a half hour's chat with a real accountant sooner rather than later would be money well spent. Also, tax deductible

 

[JonathanRyan]

I have to admit I think @Mr Bump is wrong. For an additional £10k pa I'd stay a sole trader.

It's gonna depend on how much the OP earns as PAYE. If it's within 10K of higher rate threshold it can make quite a difference.

 

[lawrenceots]

Thanks for the replies. So, the normal job is 18k basic ( in theory, will go up maybe a couple of k or so soon but nothing major) So based on that, and a max extra 10k income from the photography side of things (for now anyway) I'd still be well within the 43k 20% tax band. So, based on that.. I'd then have a second job/business that'd give me extra but not drastically do anything to the tax rating but make me "legal" for want of a better word..

 

[JonathanRyan]

Thanks for the replies. So, the normal job is 18k basic ( in theory, will go up maybe a couple of k or so soon but nothing major) So based on that, and a max extra 10k income from the photography side of things (for now anyway) I'd still be well within the 43k 20% tax band. So, based on that.. I'd then have a second job/business that'd give me extra but not drastically do anything to the tax rating but make me "legal" for want of a better word..

In that case, yes. Register as a sole trader with HMRC and declare any profit on a self assessment form (or whatever replaces them) when it's time.

 

[Nod]

Lloyds TSB do free 18 months free business banking but you would need your certificate of incorporation to set this up.

Lloyds Bank and the TSB were split back up a while ago. If the OP (or anyone else for that matter) joins the Federation of Small Businesses, they'll be able to use the Co-Op Bank who offer free business banking and give you £25 for your custom. Pretty sure that when Mrs Nod was working full time and running her own business as well, she had one tax allowance and that was eaten up by her day job so she was taxed on all her other income. Until she gave up the full time job, it was paying her NI contributions. She currently has an exemption certificate from NI but will start paying it when the certificate runs out later this year. Since she's good at keeping records and is very organised, she does her own bookkeeping (incidentally one of the very few words in English with 3 consecutive double letters!) but if you need clever accounting, an accountant is worth paying.

 

[lawrenceots]

In that case, yes. Register as a sole trader with HMRC and declare any profit on a self assessment form (or whatever replaces them) when it's time.

okay fantastic - and even thought its a sole trader register, I'd still be able to call it like "Serene Imaging" or something like that for example?

 

[JonathanRyan]

Lloyds TSB do free 18 months free business banking but you would need your certificate of incorporation to set this up.

Unless they have changed the rules, there's no legal reason you can't put a business through your own (personal) bank account. It may be considered unwise but if it's a small number of transactions and you can track them then it can save some money.

 

[lawrenceots]

Would that not be dodging tax etc though for example?

 

[JonathanRyan]

Would that not be dodging tax etc though for example?

In what way? As long as you honestly declare your income and expenses to HMRC and pay tax as levied you could keep the money under the bed.

 

[beyond the blue]

I am a sole trader, bank with TSB and find them very good I pay about £10 per month in charges. My accountant's bill is £525 including VAT.

 

[lawrenceots]

In what way? As long as you honestly declare your income and expenses to HMRC and pay tax as levied you could keep the money under the bed.

Okay fair enough! so I could set up a business name (for like £25) on the internet, and then inform HMRC that I have this business but that I will be paying tax etc and recording stuff as a sole trader, and claim the odd expense if need be?

 

[lawrenceots]

I am a sole trader, bank with TSB and find them very good I pay about £10 per month in charges. My accountant's bill is £525 including VAT.

I se, will think about that if it seems the better option, cheers!

 

[Mr Bump]

Okay fair enough! so I could set up a business name (for like £25) on the internet, and then inform HMRC that I have this business but that I will be paying tax etc and recording stuff as a sole trader, and claim the odd expense if need be?

There is more to it than that and I would urge you to consult an accountant first, most of the stuff you have to do is online with HMRC but its not very clear and easy to understand just as its in HMRC language.

 

[Mr Bump]

I se, will think about that if it seems the better option, cheers!

Sole trader will be less in accountants fees as they are not doing a balance sheet etc for companies house.
They basically do your tax return.

 

[lawrenceots]

Good advice, thank you!

 

[Mr Bump]

Unless they have changed the rules, there's no legal reason you can't put a business through your own (personal) bank account. It may be considered unwise but if it's a small number of transactions and you can track them then it can save some money.

Limited Companies
Unlike the sole trader business structure, limited companies are separate legal entities from their shareholders and directors. The personal finances of company owners are distinct from those of the companies they run.

Whereas a ‘self employed’ individual can legally use his/her personal account for business purposes, this is not possible if you follow the limited company route, so you are legally obliged to open a dedicated account for the company.

 

[JonathanRyan]

Oh yes, sorry, I was getting bogged down in the sole trader / ltd company bit Very bad idea to use a personal account for a ltd company For exactly the reasons that you would use a ltd company - it's not your money.

Okay fair enough! so I could set up a business name (for like £25) on the internet, and then inform HMRC that I have this business but that I will be paying tax etc and recording stuff as a sole trader, and claim the odd expense if need be?

I'd check with somebody who knows the sole trader rules but I don't think there's any need to "buy" a business name like that. I think you can just be "Joe Bloggs trading as Artsy Name Photography".

 

[boyfalldown]

okay fantastic - and even thought its a sole trader register, I'd still be able to call it like "Serene Imaging" or something like that for example?

Yes, however because the legal entity is you as a sole trader you'll have to make it clear on legal docs who a customer is dealing with. So your contract would read "Lawrence trading as Serene imaging"

 

[KEEFYP]

I see, is there any way to reduce the 900£ per year, as I could easily record any sales etc that would be going in to it for the accounts the following year? I was told at work that ltd would only be good if it would be over 60k per year? If I combine both normal job and then this job, would only be looking at about an income of 27k ish or so combinesd. So, am I right in that if the second job is still only earning enough to be under the 43k tax banner, the tax would be the same, barely noticeable?

Register for self assessment with HMRC, declare what you earn from your hobby minus costs and pay the tax at 20%. For a 10k income minus costs it is not worth sole trader or Ltd Co. No need to complicate things.

 

[KEEFYP]

Limited Companies
Unlike the sole trader business structure, limited companies are separate legal entities from their shareholders and directors. The personal finances of company owners are distinct from those of the companies they run.

Whereas a ‘self employed’ individual can legally use his/her personal account for business purposes, this is not possible if you follow the limited company route, so you are legally obliged to open a dedicated account for the company.

It is advisable to have a separate bank account, not a legal requirement. You can set up a personal account as Joe Bloggs t/a 'Bloggs Enterprises' in order to differentiate it from your actual personal bank account. Or you can use your personal bank account and have hells own delight if subjected to a review by HMRC.

If your 'business' trades in goods and services directly to clients and not through intermediaries, dependant on what your business is, it can be beneficial to trade as a sole trader as an individual. If your turnover is close to your costs it is often beneficial to be ST. ST can be VAT registered. The 'low rate' VAT is beneficial for a year dependant on hitting the threshold if your supplies are low.

 

[Llamaman]

You may want to consider VAT registering from day one if you are likely to incur large setup costs (buying equipment etc) to recover input VAT.

Another reason to consider trading through a company is to avoid personal liability. You'd probably want insurance for your business anyway, but if trading as a sole trader it is imperative you get yourself Professional Indemnity Insurance with sufficient cover for the work you are undertaking.

 

[Phil V]

There is more to it than that and I would urge you to consult an accountant first, most of the stuff you have to do is online with HMRC but its not very clear and easy to understand just as its in HMRC language.

I'd argue the opposite, the HMRC website is easy to navigate and easily searchable, there's also free phone lines to ask advice.

In the business section there's a useful FAQ and when you register with HMRC they'll invite you to a seminar, or if they're skint a webinar. This time of year you'll be getting almost weekly emails offering help and advice from HMRC.

 

[Phil V]

It is advisable to have a separate bank account, not a legal requirement. You can set up a personal account as Joe Bloggs t/a 'Bloggs Enterprises' in order to differentiate it from your actual personal bank account. Or you can use your personal bank account and have hells own delight if subjected to a review by HMRC.

If your 'business' trades in goods and services directly to clients and not through intermediaries, dependant on what your business is, it can be beneficial to trade as a sole trader as an individual. If your turnover is close to your costs it is often beneficial to be ST. ST can be VAT registered. The 'low rate' VAT is beneficial for a year dependant on hitting the threshold if your supplies are low.

The cost of VAT accounting and being an unpaid tax collector on earnings of £10k a year isn't what I'd recommend, in fact at under £10k a year, even an accountant would be a waste of money if you take all the freely available advice.

Some people here are seriously over thinking this.

 

[Phil V]

Register for self assessment with HMRC, declare what you earn from your hobby minus costs and pay the tax at 20%. For a 10k income minus costs it is not worth sole trader or Ltd Co. No need to complicate things.

Sole trader is what you are when you register with HMRC

 

[Nod]

The cost of VAT accounting and being an unpaid tax collector on earnings of £10k a year isn't what I'd recommend, in fact at under £10k a year, even an accountant would be a waste of money if you take all the freely available advice.

Some people here are seriously over thinking this.

On top of the extra effort involved, you also add 20% to your prices which will put many customers off. Yes, it means you can reclaim any VAT you pay on legitimate business expenditure but the extra time and effort being (to use Phil's phrase) an unpaid tax collector is a royal PITA.

 

[AJQS]

There is a tax calculator buried somewhere in the Gov website that will tell you how much you'll pay as a sole trader.

 

[Russ77]

I've been set up as a sole trader since 2012, never used an accountant as the amount of photography work I do is fairly minimal and I've made loses during the last 2 years due to the initial expenses of setting up (editing PC, software, insurance etc).

I've got a full time job where I'm PAYE so all I do is pay 20% tax on my profits from my photography work. It did seem quite daunting at first but an old school friend who's an IFA helped me through my self assessment and it's not too difficult really.

The only reason I really set myself up as a ST is because people kept asking me to do photoshoots & parties for them and I didn't want any comebacks about undeclared income (online photo galeries are a dead giveaway that you've been doing extra work). My insurance is just over £300 p/a and I'm barely doing that in "jobs" at the moment, although I'm going to start promoting a little more now things are settling down after my daughter was born last year.

 

[KEEFYP]

The cost of VAT accounting and being an unpaid tax collector on earnings of £10k a year isn't what I'd recommend, in fact at under £10k a year, even an accountant would be a waste of money if you take all the freely available advice.

Some people here are seriously over thinking this.

I notice you have quoted my response to Limited Companies paragraphs posted in my response, but conveniently not copied the whole response. Nowhere in the Limited Companies paragraphs is there mention of £10k pa.

I suggest, at best, you are being disingenuous.

£10k pa does not meet the VAT threshold. You appear to be ignorant of that fundamental. It is optional to register for VAT prior to the start of the month in which your sales will reach the VAT threshold applicable to your classification, not all businesses are subject to charging VAT. Therefore check. Section 267 I think, but don't quote me on that.

The post above by Russ77, based on factual experience is spot on, and reflects my earlier comment in respect of registering for self assessment. The reason for specifically advising to register for self assessment is that you may be employed by an employer that has a clause in you contract of employment that specifically prohibits you from second and/or subsequent employment, which acting as a sole trader is.

If you have unearned income, for example interest on savings, income from property, income from ebay sales at scale (photographs??) you are subject to self assessment; you in effect are acting as an unpaid tax collector.

 

[Phil V]

I notice you have quoted my response to Limited Companies paragraphs posted in my response, but conveniently not copied the whole response. Nowhere in the Limited Companies paragraphs is there mention of £10k pa.
I suggest, at best, you are being disingenuous.

£10k pa does not meet the VAT threshold. You appear to be ignorant of that fundamental. It is optional to register for VAT prior to the start of the month in which your sales will reach the VAT threshold applicable to your classification, not all businesses are subject to charging VAT. Therefore check. Section 267 I think, but don't quote me on that.

The OP has said his turnover is unlikely to be above £10k pa. That's where the figure came from, and why it's crucial to the conversation.

I can't see anyone wanting to start a limited company or register for VAT with that kind of turnover...

You weren't the only one with OTT suggestions, just the one that led me to reply.

The post above by Russ77, based on factual experience is spot on, and reflects my earlier comment in respect of registering for self assessment. The reason for specifically advising to register for self assessment is that you may be employed by an employer that has a clause in you contract of employment that specifically prohibits you from second and/or subsequent employment, which acting as a sole trader is.

If you have unearned income, for example interest on savings, income from property, income from ebay sales at scale (photographs??) you are subject to self assessment; you in effect are acting as an unpaid tax collector.

When you register for 'self assessment' you have to have a reason, and if you're buying kit and selling your services, that reason is 'self employment'. You can't just report an income and not specify where it's come from (they'll want to chase you for NICs too if appropriate).

That's 'real world' from someone who is right now employed and self employed too

You're only an 'unpaid tax collector' when you register for VAT. I don't collect tax, I only pay it, directly and indirectly.

If I register for VAT, I'll be collecting it. That's how the system works, my £1000 wedding package would become my £1240 wedding package with the £240 going straight to the VAT man through my accounts. There's no way on my turnover I could make that back claiming VAT back.

In fact, whilst ever my customers are not businesses, registering for vat whilst below the threshold is idiocy, all it does is increase my prices.

Hope you can see where I'm coming from now

 

[KEEFYP]

The OP has said his turnover is unlikely to be above £10k pa. That's where the figure came from, and why it's crucial to the conversation.

I can't see anyone wanting to start a limited company or register for VAT with that kind of turnover...

You weren't the only one with OTT suggestions, just the one that led me to reply.



When you register for 'self assessment' you have to have a reason, and if you're buying kit and selling your services, that reason is 'self employment'. You can't just report an income and not specify where it's come from (they'll want to chase you for NICs too if appropriate).

That's 'real world' from someone who is right now employed and self employed too

You're only an 'unpaid tax collector' when you register for VAT. I don't collect tax, I only pay it, directly and indirectly.

If I register for VAT, I'll be collecting it. That's how the system works, my £1000 wedding package would become my £1240 wedding package with the £240 going straight to the VAT man through my accounts. There's no way on my turnover I could make that back claiming VAT back.

In fact, whilst ever my customers are not businesses, registering for vat whilst below the threshold is idiocy, all it does is increase my prices.

Hope you can see where I'm coming from now

Unfortunately I can't see where you are coming from.

My initial response above (copied in italics below) that led you to reply to my OTT suggestions was:
'
↑
Limited Companies
Unlike the sole trader business structure, limited companies are separate legal entities from their shareholders and directors. The personal finances of company owners are distinct from those of the companies they run.

Whereas a ‘self employed’ individual can legally use his/her personal account for business purposes, this is not possible if you follow the limited company route, so you are legally obliged to open a dedicated account for the company.
It is advisable to have a separate bank account, not a legal requirement. You can set up a personal account as Joe Bloggs t/a 'Bloggs Enterprises' in order to differentiate it from your actual personal bank account. Or you can use your personal bank account and have hells own delight if subjected to a review by HMRC.

If your 'business' trades in goods and services directly to clients and not through intermediaries, dependant on what your business is, it can be beneficial to trade as a sole trader as an individual. If your turnover is close to your costs it is often beneficial to be ST. ST can be VAT registered. The 'low rate' VAT is beneficial for a year dependant on hitting the threshold if your supplies are low.'

I made no mention of Limited Company or VAT registration thereof. I do mention that 'sole traders can be VAT registered. The 'low rate' VAT is beneficial for a year dependant on hitting the threshold if your supplies are low.' Perhaps that is where you became confused as you were reading another part of the thread relating to the £10k pa figure. The post was formed of parts identified by bold text of 'Limited Company', which in my experience denotes a separate string to the writings.

My advise around Sole Trader was to register for self assessment based on the proposed earnings being £10k pa, being an upstanding member of society you would do that anyway, but not as a sole trader. Each year you file the relevant form and pay the tax due, which you are collecting. What is OTT in there?

I have my own Limited Company that is VAT registered, and am also registered for self assessment. So that is my real world experience and knowledge. I have previously operated as a ST with VAT registration.

In respect of your example with the £1200 wedding package, if you charged VAT, your payment to the VAT man would be minus any VAT you incurred on 'supplies' such as the fuel in your vehicle that you used to go to and from the venue / client meetings, on your mobile or landline that you offset all or part of to run your 'business' (as a ST), on any meals, accommodation etc So in fact, you would not pay the £240 straight to the VAT man. You could also earn interest on the VAT amount each quarter.

I suggest your responses are less full, and possibly incorrect than you purport.

 

[Llamaman]

.

 

[Phil V]

Unfortunately I can't see where you are coming from.

My initial response above (copied in italics below) that led you to reply to my OTT suggestions was:
'
↑
Limited Companies
Unlike the sole trader business structure, limited companies are separate legal entities from their shareholders and directors. The personal finances of company owners are distinct from those of the companies they run.

Whereas a ‘self employed’ individual can legally use his/her personal account for business purposes, this is not possible if you follow the limited company route, so you are legally obliged to open a dedicated account for the company.
It is advisable to have a separate bank account, not a legal requirement. You can set up a personal account as Joe Bloggs t/a 'Bloggs Enterprises' in order to differentiate it from your actual personal bank account. Or you can use your personal bank account and have hells own delight if subjected to a review by HMRC.

If your 'business' trades in goods and services directly to clients and not through intermediaries, dependant on what your business is, it can be beneficial to trade as a sole trader as an individual. If your turnover is close to your costs it is often beneficial to be ST. ST can be VAT registered. The 'low rate' VAT is beneficial for a year dependant on hitting the threshold if your supplies are low.'

I made no mention of Limited Company or VAT registration thereof. I do mention that 'sole traders can be VAT registered. The 'low rate' VAT is beneficial for a year dependant on hitting the threshold if your supplies are low.' Perhaps that is where you became confused as you were reading another part of the thread relating to the £10k pa figure. The post was formed of parts identified by bold text of 'Limited Company', which in my experience denotes a separate string to the writings.

My advise around Sole Trader was to register for self assessment based on the proposed earnings being £10k pa, being an upstanding member of society you would do that anyway, but not as a sole trader. Each year you file the relevant form and pay the tax due, which you are collecting. What is OTT in there?

I have my own Limited Company that is VAT registered, and am also registered for self assessment. So that is my real world experience and knowledge. I have previously operated as a ST with VAT registration.

In respect of your example with the £1200 wedding package, if you charged VAT, your payment to the VAT man would be minus any VAT you incurred on 'supplies' such as the fuel in your vehicle that you used to go to and from the venue / client meetings, on your mobile or landline that you offset all or part of to run your 'business' (as a ST), on any meals, accommodation etc So in fact, you would not pay the £240 straight to the VAT man. You could also earn interest on the VAT amount each quarter.

I suggest your responses are less full, and possibly incorrect than you purport.

Forget your post. I wasn't 'having a go' read my post again, the OP is talking about a turnover of less than £10k.
I'm well aware how VAT works, and how much 'outgoings' a photography turnover of £10,000 requires. (Would you like to have a guess about those costs, what's allowable expenses etc. I'm guessing I can give a more accurate breakdown). Of course I haven't given a 'full' response, it'd take me pages of writing rather than a copy and paste from the internet. I gave a broad enough idea to prove a point. Google won't provide you with the detailed response required to fill out your answer.

I appreciate the massive amount of interest £240 would make in a year (are you serious, at current interest rates?). The amount of VAT I'd be able to reclaim in a year would just about equal a third to a half the VAT I'd be collecting. As a B2C business how do you suggest I make my service worth the 22% extra I'd be charging? And if it's easy to do that, why don't I just charge the extra 22% and keep the extra?

I would estimate the OP would be making a 'profit' of less than £5k, so a tax bill of £1k at most. Trading as a ltd company would cost him half that profit, so it would definitely reduce his tax bill. Registering for VAT would cost him more than half his potential business (being 22% more expensive than the competition would do that) again, a sure fire way of reducing his personal tax bill, but kinda missing the point.

Also the 'bloke trading as a Ltd company' doesn't offer the 'limited liability' it was once considered to. Plenty of company directors have lost their personal fortunes when they've run into trouble. Your creditors can still come after you for the debts of the company.

Again, let's get some perspective (direct from the OP)...

Hello!..., I want to set up a side business, listed as sole trader. All has to be completely above board etc.
...How much would I be taxed in conjunction with the normal job and this side business
The side business would only be pulling in under 10k per year (at the moment initially)
Best way to go about setting it up and informing the govenerment so I'm all above board etc

Advice much appreciated!

You've had a Google, I've run a couple of identical businesses to the OPs question

 

[Phil V]

Let's just take this tiny bit...

... if you charged VAT, your payment to the VAT man would be minus any VAT you incurred on 'supplies' such as the fuel in your vehicle that you used to go to and from the venue / client meetings, ...

Would you like to explain to the me the entire process required so that I can claim back the VAT on the 50 mile average I do per job? (So roughly £1 VAT back).

If you really do run a VAT registered business I'd like to see your breakdown of the costs and advantages for such a tiny business.

And show us all the guidance for registering for self assessment without being 'self employed', how you would register your business costs etc.