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Self Employment

Becoming self-employed is one of the biggest decisions you are ever likely to make. It is not a way to earn a living that suits everyone and a lot of people give up after a while and go back to being an employee again, but with the right approach and sufficient resources it can turn out to be the best thing you ever did.

One of the first decisions you need to make when you become self-employed is what type of legal entity your business is going to be. Basically you have a choice between being a sole trader, a partnership or a limited company. There are also other legal forms such as limited liability partnerships, co-operatives and companies limited by guarantee but these are not generally applicable to most small businesses.

There are many factors to bear in mind when making this choice such as how much profit you expect to make, how much tax you can save, the additional costs and responsibilities of running a company and, where more than one person is involved, who is going to do what and for how much. We have prepared a series of Information Sheets on self-employment which may help with your decision.

Click on the links below to discover more

Information Sheets Tax Tips
bulletpoint Are you really self-employed?
bulletpoint Should you be self-employed?
bulletpoint Preparing for self-employment
bulletpoint Your choice of legal entity
bulletpoint Saving tax by being self-employed
bulletpoint Capital allowances
bulletpoint Cars and vans
bulletpoint The new agency rules
Legal form
Check how much tax you would pay as a sole trader or a limited company
Your partner
Consider giving your partner a stake in the business as it could reduce your combined tax bill
VAT registration
Consider whether it would benefit you to register voluntarily or use the flat rate scheme
Cars
Check whether it would be better to have a company car or claim mileage for your own car
Home office
Claim expenses for use of your home as an office or charge rent to your company for it

Example

Mr Kipling plans to start a business selling cakes and expects to make a profit of £60,000. His tax and NI as a sole trader would be as follows:

Tax on £37,400 x 20% = £7,480
Tax on £16,125 x 40% = £6,450
Class 4 NI at 8% x £38,160 = £3,052
Class 4 NI at 1% x £16,125 = £161
Class 2 NI at £2.40 per week = £125
Total = £17,268

If he trades as a limited company and takes the optimum mix of salary and dividends, he would pay no NI and his tax bill would be as follows:

Income tax = £2,135
Corporation tax = £11,399
Total = £13,534

His net income after tax would increase from 71% of profits to 77% and he would save £3,734.

If Mr Kipling employs his wife and gives her 50% of the shares, they would pay no income tax or NI whatsoever and the company would only pay corporation tax of £10,198. Their combined income after tax would go up to 83% and they would save a further £3,336. An exceedingly good result, one might say!

Come and speak to us if you would like to know how much tax you could save by incorporating your business.

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