Creativebias Helpsheet: Understanding Tax and National Insurance

Understanding Tax and National Insurance

A Guide for Creative Industries Entrepreneurs

Introduction

Starting and running your own business requires careful planning and monitoring. The law says you need to keep clear records so that you can prove how much income you’ve earned and how much you have paid in costs and expenses. Records include things like bank or building society statements, receipts, invoices and cash transaction records as well as rent or bills for any premises you use. As a new business, you should keep anything that will help you or your accountant keep track of your income and expenses for at least five years. You don’t have to have a business bank account, but you do need to be able to show clearly which of your transactions are business-related and which are personal.

Note: Government regulations and figures, such as those included in this guide, are subject to change. Although every effort has been made to ensure the accuracy of the information contained within this helpsheet, the authors accept no liability for inaccuracies or omissions. Always seek up to date professional advice regarding legal and financial matters.

HMRC: Her Majesty’s Revenue and Customs

Your records help you keep track of your accounts and make it easier to fill in tax returns. Her Majesty’s Revenue and Customs (HMRC) are the new Government Department who do the combined work of the former HM Customs and Excise and the Inland Revenue in collecting taxes and National Insurance contributions.

The HMRC website www.hmrc.gov.uk has lots of information about tax and National Insurance issues for new businesses. It also has a library of leaflets, information packs and forms that you can download. HMRC run telephone helplines to answer questions you may have about your business. You can also order copies of leaflets etc through the post by calling the relevant helpline (see below for useful telephone numbers). The Business Support Team www.hmrc.gov.uk/bst runs workshops and presentations that help you to understand tax and National Insurance and how it applies to your business.

You may have already decided what kind of a business you will be. The most common kinds of business structure are sole trader, partnership, and limited company. The type of business you are affects the way you are taxed and the kinds of records you have to keep. If your records are incorrect it may mean you don’t pay enough tax and have to pay a penalty; or you could pay too much tax which could damage your business.

For more information on legal requirements and other practical advice for new businesses, call HMRC’s Helpline for the Newly Self-Employed on 08459 15 45 15. You can arrange a free appointment to speak to an adviser face to face. Also see www.hmrc.gov.uk/startingup/keeprecs.htm for guidelines on keeping records.

Tax, National Insurance and your Employment Status

Your employment status refers to whether you are employed by someone else (an employee) or work for yourself (self-employed).

As a guide, HMRC say you are self-employed if you are in business on your own account (usually as a sole trader), and you bear the responsibility for the success or failure of that business. Once you have set up in business and have begun to trade, you must contact HMRC and register as self-employed. The easiest way to do this is by calling the Helpline for the Newly Self-Employed on 08459 15 45 15. It doesn’t matter if you aren’t making much money yet, or if you already send in a yearly tax return, you still need to register.

There is a £100 fine if you do not register within three months of starting to trade. If you are trading and not paying tax, you are breaking the law and may face further penalties.

"Revenue and Customs want you to succeed. Don’t be frightened to ask them questions.”

Tania M. C. Lewis, Creativebias Personal Business Adviser

Your employment status affects how much tax and National Insurance (NI) you have to pay, and how it is collected. It also affects your employment rights and eligibility for certain Social Security benefits. As a self-employed person, you are responsible for paying your own tax and NI contributions. Just because you are employed or self-employed in one job though, it doesn’t necessarily mean you will be in another job. For example, you could be employed full or part time by someone else, whilst running your own business at weekends and in the evenings.

Company directors are normally classed as employees of the company for tax and NI purposes. This means that their tax and NI contributions are deducted from their wage packet in the same way as for any other employee. Read leaflet IR56 for more information on employment status and tax, and leaflet CA44 for NI rules for company directors.

Income Tax Self Assessment

Now you are registered and trading, you will need to send in a self assessment tax return once a year.

This is a form which asks for information on your income and expenses for that year. HMRC uses the information in your tax return to work out how much tax and NI you need to pay. It can be filled in on a paper form or online. You should be sent a form automatically soon after the end of each tax year (5th April) once you have registered as self-employed. But even if you are not sent a form you must still submit a tax return.

The online form quickly calculates your status: you can see straight away if you owe any tax. If you complete the paper form you must post it back by 30th September if you want the calculations done for you, or 31st January if you want to do them yourself. A statement will be sent to you, but you should keep a copy of your tax return for your own records.

Anyone who files a tax return late has to pay a £100 penalty. If you are late paying a bill you will be charged interest on the amount.

For more information about self assessment go to www.hmrc.gov.uk/sa or call the Self-Assessment Helpline (08459 000 444). Limited companies must submit annual accounts and employee pay records, in addition to annual tax returns.

"Tax is a bill like any other bill. Remember to budget for it by putting away a proportion of your earnings every month. If you’ve saved too much by the end of the year you can celebrate. If you’ve saved too little it won’t be by much.”

Tania M.C. Lewis

From your second year of trading you will be asked to make payments on account. These are estimates of your next tax bill based on the previous year’s return. You usually have to make two payments, one on 31st January and one on 31st July. The payment on account goes towards your final bill of the tax year. If you disagree with the estimate (for example, if you expect to earn much less or much more than you did in the previous year) you can ask for the payments to be altered.

National Insurance Contributions

There are several different classes of NI contributions:

• Class 1 contributions are deducted automatically from all employees’ wage packets; classes 2 and 4 are paid by the self employed.
  
• Class 2 contributions are a fixed weekly amount (2007/8 is £2.20; 2008/9 is £2.30), payable every 13 weeks in arrears unless you choose to pay monthly by direct debit.
  
• Class 4 contributions are dependent on your business’s income. Any NI credits you pay go into the state fund for pensions, benefits and healthcare.
  
  If your yearly income is less than £4,635 in 2007/8 (or £4,825 in 2008/9)) you can apply for a Certificate of Small Earnings Exemption, which means you don’t have to pay Class 2 contributions. Remember though that not paying NI may affect your future entitlement to benefits. When you earn more than £4,635 per year (or £4,825 in 2008/9) you will be billed for Class 2 NI contributions
  
  For 2007/8, if your net profit is above £5,225 per year, you will have to pay Class 4 contributions. These contributions are based on your annual taxable profit, and are collected from your yearly tax return. The current rate is 8% of profits between £5,225 and £34,840. On profits above £34,840 the rate is 1%.
  
  For the tax year 2008/9, the figures are 8% of your annual taxable profits between £5,435 and £40,000; and % above that.
  
  If your business is a partnership, each partner pays their own Class 4 contributions. Further information on current rates and thresholds can be found at www.hmrc.gov.uk/nic/index.htm. If you would like to know more, you can call the Self-Assessment Helpline (08459 000444). Leaflet CF10 has information about tax exemption for self-employed people with small earnings.
  
  
  

  Tax allowances, Tax Credits and Tax Relief

  
  Depending on your income level and circumstances, you may be able to claim tax allowances and tax credits. All UK taxpayers have a basic tax allowance. This is an amount of money that you are allowed to earn in each tax year that does not have any tax taken from it; currently £5,225 for people under 65.
  
  Your tax allowance may be more than this depending on your situation, for example you may qualify for Married Couples Allowance. The tax bands for income earned above your allowance are shown in the table below.
  
  
  Income Tax Payment Bands 2007/8:
  

  	Taxable Income*	Rate of tax
  Starting Rate	Up to £2,230	10%
  Basic Rate	£2,231 to £34,600	22%
  Higher Rate	Above £34,600	40%

  
  
  
  Income Tax Payment Bands 2008/9:
  

  	Taxable Income*	Rate of tax
  Starting Rate	-	-
  Basic Rate	Up to £36,000	20%
  Higher Rate	Above £36,000	40%

  
  
  *Your taxable income is how much you earn in excess of your tax allowance.
  
  There are two kinds of tax credits: Working Tax Credit, to help people on low incomes; and Child Tax Credit, for people with dependent children. Visit or call your local HMRC Enquiry Centre (see below) to speak to someone in person, or go to www.hmrc.gov.uk/taxcredits for more information.
  
  HMRC offer many different kinds of tax relief for people in various circumstances. Some of these circumstances are not relevant to new businesses, but some are designed especially to help you get your business established. Capital Allowance is a tax relief on business equipment or furniture that you intend to keep. For more details on Capital Allowance visit www.hmrc.gov.uk/capital_allowances/
  
  
  

  Employing Staff

  
  If you intend to employ staff to provide your services, you will need to know about the tax and NI contributions rules that may apply to your new situation. As an employer, you are responsible for keeping a payroll and deducting the correct amount of tax and NI from each of your employees’ wages. This system is known as Pay As You Earn (PAYE). The New Employer Helpline (tel: 0845 60 70 143, or textphone 0845 602 1380) will be able to advise you on how to prepare for employing staff, and how and when to pay your employee tax contributions to HMRC. There is also online help at www.hmrc.gov.uk/employers and lots of additional support available to help you manage the change.
  
  
  

  International Trade

  
  Buying from or selling to people outside the European Community (EC) is classed as International Trade.
  Trading with people or businesses outside the EC must be declared to HMRC, and your goods may be liable for taxes such as import VAT, export VAT and duty.
  
  The rules governing taxation and trade with countries outside the UK are complex, for detailed advice you should call Revenue and Customs National Advice Service (tel: 0845 010 9000, or textphone 0845 000 2000). UK Trade and Investment www.uktradeinvest.gov.uk has expert advice for businesses exporting for the first time or expanding into new markets. The Small Business Service www.sbs.gov.uk in conjunction with Business Link www.businesslink.gov.uk offers more general advice on becoming more competitive and profitable in the UK and overseas.
  
  
  

  Understanding VAT

  
  Value Added Tax (VAT) is a tax on certain goods and services in the UK. The standard rate of VAT is currently 17.5% but different rates may apply depending on the product or service you provide.
  
  If your turnover in any given year exceeds or is expected to exceed £67,000, you must register for VAT with HMRC. You can do this online at http://customs.hmrc.gov.uk. You will have to charge your customers VAT on top of the services or goods you provide, and you will need to submit regular VAT returns. If you receive more in VAT from your customers than you pay out to your suppliers, you must pay the difference to HMRC.
  
  If you have any questions about VAT you can call the Customs and Excise National Advice Service (0845 010 9000). You can register before you reach the £60,000 threshold; if you pay more VAT to suppliers than you receive from customers, your business may benefit from registering early. Your Creativebias Personal Business Adviser can offer advice to help you make your decision.
  
  
  
  

  Links and Useful Contact Numbers

  Newly Self-Employed	www.hmrc.gov.uk/startingup
  Helpline for the Newly Self-Employed	08459 15 45 15
  Self Assessment	www.hmrc.gov.uk/sa
  Self Assessment Helpline	0845 9000 444
  National Insurance	www.hmrc.gov.uk/nic
  Self-Employment Contact Centre	08459 15 46 55
  Tax Credits	www.taxcredits.inlandrevenue.gov.uk
  Tax Credits Helpline	0845 300 3900

  
  
  
  HMRC Enquiry Centres (formerly Inland Revenue Enquiry Centres)
  
  Speak to someone face to face for advice and information tailored to your needs. Most Enquiry Centres offer a high standard of accessibility including:
  
  
• Induction Loops
  
  
• Lighted Magnifiers - to help you read forms
  
  
• Crystal Listening Devices - to help you if you are hard of hearing
  
  
• Sign Language Interpreters - a British Sign Language Interpreter can be arranged for you if you notify in advance
  
  
• Written material in Braille, audio and large print
  
  
• Help for people for whom English is not their first language - interpretation can be arranged for you. Please ask at your nearest Enquiry Centre
  
  
• Help for people who need assistance in completing forms or returns - Please ask at your nearest Enquiry Centre
  
  
• Home Visits - if you have limited mobility or have caring responsibilities you may be offered a home visit. Please ask at your nearest Enquiry Centre.
  
  
  Local HMCR Office Addresses (Merseyside)
  

  Liverpool Regian House James Street Liverpool L75 1AA

  Wirral Birchen House 1 Canning Street Birkenhead CH41 6RA

  Widnes Kingsway House Caldwell Road Widnes WA8 7ET

  Sefton The Triad Stanley Road Bootle L75 1HP

  St Helens 63 College Street St Helens Merseyside WA10 1TN