Self Employed

You can’t get away from it – if you are self employed you have to make sure you are taking care of your tax obligations. If you don’t you are running the risk of penalties from HMRC and, in many cases, paying more tax than you need to.

Starting the way you mean to go on is an important rule because it helps keep you compliant, on time and as tax efficient as possible. That said, it’s never too late review your current processes to see if improvements can be made.

Things to consider

What you need to do depends on the type of business you have. For example a sole trader has different needs to a small or medium size business with employees. The main bits include:

• Record keeping
• Self Assessment
• VAT
• Payroll
• Corporation tax
• National insurance

Do I need an accountant?

In most cases it’s considered a good idea to seek professional support for at least some, if not all, of your tax needs. It can often be a false economy not using someone to help you, especially when you have your own business to look after. A good accountant can save you time and money by keeping you compliant and up to date with any changes.

Whatever your business, you will be using energy of some sort and these costs are allowable for tax relief. There are different rules for working from home and working from a business premises (workshop, shop etc,).

Self employed, working from home

You can claim for the gas or electric need for heating and lighting, water rates, phone/broadband etc. The amount is worked out on a percentage of your total bills, comparing the time and space using home for work and using home as a home. For example, literally looking at the floor plan of your office space as a proportion of the overall space in your home and dividing the electricity bill accordingly. Taking into account the number of hours a day your home is used for business.

Self employed, with a business premises

If you have a business premises, you can claim tax relief on water rates, lighting and heating as part of your energy savings.

So, as well as finding the best energy package from energy companies, you can also make energy savings by making sure that you make a work expenses tax relief claim for your business’s energy costs.

Wherever you are using energy for your business, the best is advice is to shop around for the best value deal. Don’t presume that loyalty to a company will mean that you get the best prices – a ‘switching’ culture means the exact opposite. Review your energy prices regularly and switch to another company whenever you can see the benefit.

It’s difficult to think about all the ‘what ifs’ of personal ill-health, particularly when you are reliant on your income as a self employed worker. There are several different types of insurance available to cover you for periods of illness and death.

Private Medical Insurance
People who have private medical insurance may have more options for  treatment, than those who are solely reliant on the NHS. For example, instead of being off work for an extra 3 weeks while you wait for the necessary treatment, you can pay to skip the queue and get it done sooner – saving you time and money in the long run. Some companies have medical insurance as an employee benefit, but as a self employed worker it becomes a question of budget.

Income Protection
This type of insurance policy is designed to provide a monthly payment if you become unable to work because of illness or injury. The amount is based around your net income and can be received until your age of retirement, if you cannot return to work.

Critical Illness Cover
This type of insurance policy is designed to provide one payout, tax free, if you fall ill with a serious disease or condition. Each policy covers a defined list of diagnoses and only those conditions listed are covered by the policy. Strokes, heart attacks and cancer are often included; back conditions and stress are not, even though they may have long term effects on your ability to work. The purpose of these policies is to either help with modifications to your home or car to adapt to new physical needs, like wheelchair use; or, to get rid of larger amounts of debt, like your mortgage.

Life Insurance
Most of us are aware that, despite their name, life insurance policies are designed to be financial protection for your family after your death. Depending on the policy, this could take the form of monthly payments or one larger payout. Many people with children or partners take out life insurance, to make sure they are properly taken care of in the event of your death.  
Top tips

• Most self employed people have critical illness cover and income protection, with life insurance also a ‘must have’ if they are a parent or carer. Medical insurance is more on the ‘nice to have’, if you can comfortably afford it.
• Self employed people working from home may need to bump up their home insurance to include equipment and meetings. Otherwise you may make a claim only to discover that you are not covered.
• If you were previously part of a health or life insurance scheme as an employee, then it’s worth finding out how much it would be to continue. It will be more expensive, but might work out as the best deal.
• Shop around – compare different policies for the best value before you sign up. And always read the small print!

There are many different types of business insurance and it is important to get the right one for your business. Many factors come into play, but it will probably be obvious which policy is right for you from the following list:

Car/Van Insurance
You will need to check that any vehicles used for work are insured for business use. This includes employees using their own vehicle, as well as cars, vans and motorbikes that the business owns.

Professional Indemnity Insurance
This insurance is designed to cover professional mistakes that have a serious negative impact on a client and result in financial loss. It is crucial for those professionals who provide legal, financial, medical and other similar services. For example: financial advisers, journalists, doctors, accountants, engineers and many other professions. Professional Indemnity policies pay out a lump sum if you are judged to have cost your client money or have been negligent in your professional duties.

Public Liability Insurance
This kind of insurance cover protects you against situations in which a member of the public has been harmed by an action of your business.

For example, if someone trips on a loose floorboard in your shop and breaks their arm, they may sue you and your public liability insurance would kick in to provide their compensation.

There are some businesses that are legally obliged to carry public liability insurance.

Employers’ Liability Insurance
This is a legal requirement if you have any employees in your business – yes, even if it is only one person! It is to cover their potential injuries at work.

Product Liability Insurance
This type of insurance is to cover you in case any of your products damage property, cause injury or kill someone. The policy would provide the compensation for such mistakes. You do not have to have been negligent to be responsible for faulty goods and liable for their damage. If you are producing high risk items – such as toys, consumables or electrical good – then it is strongly advisable.

Top tip
Shop around and compare deals until you find the best value for your business. Many insurance companies will package common business insurance elements together in one bundle, which can be cost efficient if you need everything in the bundle. You could also use an insurance broker to do all the comparison work for you.

Self employed people apply for the same mortgages as employed people; a ‘self employed mortgage’ isn’t a thing. Mortgage lenders have stringent criteria which can make it more difficult for the self employed to secure a mortgage.

What do I need to show a mortgage lender?
You will need at least two years’ worth of accounts which have been ratified by an accountant. Many lenders will not even look at do-it-yourself accounts, even if HMRC were satisfied with your submissions. They will want copies of your SA302 forms, which show your official tax calculations at the year end.

Obviously, the better shape your business is in, the more attractive a prospect you are to a mortgage company. You need at least a consistent, if not growing, profit over as many years as possible. Lenders are looking for your average profits over time to figure out how great a risk you are to them. It strengthens an application if you can show evidence of any future business you have coming in, like contracts.

Predictably, the bigger your deposit, the better your chances – you need at least 10-20% of the property’s value.

Does it matter what type of business I have?
The structure of your business can affect your mortgage application.

• As a sole trader, lenders will want to see your SA302 and self assessment information (your accountant can give you this).
• As a partner in a joint venture, mortgage companies only take into account your personal share of the business profits.
• As a limited company, things get slightly more complicated. Business and personal accounts now exist separately, so the mortgage lender considers your salary and dividends in their calculations. Often any profits that you keep in the business are not included in a mortgage application.

Top tips

• Mortgage companies look at all outgoings in the year prior to your application – so prepare early and get rid of any unnecessary expenditure.
• Professional mortgage advice is invaluable and independent advisors can be found, such as the Which? helpline. This should help you avoid having applications turned down, which negatively impacts on you credit score.
• Have a little spring clean of your finances: close that account you haven’t used in years, check there are no errors on your credit report, pay off debts if you can.
• Make sure you are registered on the electoral roll.

We’re not going to sugar coat it – it is harder for self employed businesses to get a business loan, simply because lenders consider your income to be less stable. But this doesn’t mean it’s impossible, there are just more boxes to tick.

What type of business loan can I get?
There are all kinds of packages of business loans available; they all fall into two main categories:

• Secured Loans – you have given a business asset (like your premises) as security for the amount you are borrowing. This means that the lender can sell this asset if you don’t repay the loan in full.
• Unsecured loans – your business assets are not at risk if you do not repay the loan, as they have not been written in as security.
• Start up loans – these are a government initiative for a term of 1 to 5 years for brand new businesses. There are no application or early repayment fees and charge a 6% fixed interest rate. They are worth investigating, if you are just starting up.

Important note:
Most business loans contain a ‘Director’s Guarantee’, which makes the company director liable for the business’s debt if it folds.

How much can I get?
This all depends on your business’s financial position and the details of the loan agreement. Commercial loans range from £100 – £3million, with payback schedules running from a month to 15 years.

What do I need?
You need a statement of earnings for the last 3 years, as minimum paperwork and the expected credit checks of your business will be done.

Are all loan companies properly regulated?
Companies that lend to limited companies are the only ones that must be legally regulated. This may increase the potential risk for people using companies that lend exclusively to sole traders.

What can I get a business loan for?
You can use a business loan for just about any purpose: new premises, stock, extra staff, more equipment, pay off business debt or planned expansion.

Top tip
Companies may charge an administration fee that is either payable upfront, or tacked on to what you owe.

Many of the issues around self employed business loans are similar to those of securing a self employed business credit card. You are higher risk than an employed person, so you need more evidence and will probably face higher interest rates. But if your business is running successfully and you have all the relevant paperwork, you should be able to find a reasonable rate. Your business’s good credit rating is key to making sure you steer clear of the highest interest rates.

There are some specifically marketed ‘self employed credit cards’, but they usually come with the highest of interest rates attached. They are useful if you have a low credit scored and you are certain that you can pay them off within the interest free time limit. That way you can build your credit score over time and then switch to a better rate.

Top tip
Make sure that you are on the electoral register before you apply – it makes a difference.

Business law is vast, but the good news is that you don’t need to understand it all. You only need to abide by the legal regulations that affect your type of business structure and any industry laws that are specific to your sector.

Tax law
Tax law is complex and deals with the rules covering the policies and laws that oversee the tax process. For a self employed person seeking tax advice is always recommended and should keep you on the right side of tax law.

Employment law
If you have employees or are planning to employ someone employment law is relevant. It covers what employers can expect from an employee and vice versa. It’s there to cover both parties’ legal rights and includes holiday pay, discrimination, and dismissal.

Bad debt recovery
It can happen to any business. You’ve done the work but you have not been paid. As a business there are things that can be done legally to try and recoup your fee from the person or organisation that you have done work for.

Depending on the type of business you have some or all of the below may need to be taken into consideration:

• Health & safety regulations
• Advertising and marketing
• Intellectual property law
• Licensing
• Privacy law
• Do I need a Solicitor?

Taking legal advice is always recommended with the potential risks not worth taking. Acting on the right advice can give you peace of mind and save you a lot of time and money in the future.