If you’re new to self-employment, it can be a challenge to know where to start and what to do, especially when it comes to taxes. As a self-employed consultant, doing taxes is part of running your business, so it’s something you should stay on top of from the get-go.
However, we understand it can be hard to have enough time to manage your own finances when you’re taking care of other people’s businesses so, as accountants for consultants, we’re here to help.
Benefits of Being a Self-Employed Consultant in the UK
Many people dream of becoming self-employed and being their own boss. For self-employed consultants in the UK, this means being able to create your own schedule and hours. This flexibility is part of the appeal of being self-employed, since you don’t have to be stuck working a 9-to-5 if you want a better work-life balance.
Another big draw of being a self-employed consultant is the ability to set your own rates, with freelancers and contractors able to command higher rates than the salaries they had as full-time employees.
In addition, self-employed consultants are also able to do things their way. You’re in complete control of your business and can explore avenues that you may not have had the chance to explore before, for instance. And if you can run your business from home, you don’t have to worry about a commute, which will save you time and money.
Your work will also be more varied. As a consultant, you can choose which clients to work with and which jobs to take on, so you’re free to pick only the ones that offer you a professional challenge or are more lucrative.
If you’re looking to become a consultant, then one thing to decide is whether you want to work as a freelancer under a sole trader structure or set up a limited company. Both options are valid, but managing your taxes is different depending on what you choose.
As contractor accountants, we work with individuals operating through both types of structure and can help you to sort out your taxes as well – including boosting the tax-efficiency of your business.
Managing Taxes as Sole Traders
As a freelance consultant, you will have to pay income tax and two different types of National Insurance contributions on your earnings: Class 2 and 4.
Earnings refer to the money you’re paid as a consultant, minus your expenses and allowances. If you want to offer your consultant services as a sole trader, you have to register with HMRC. You’re entitled to a personal allowance as well, which is the amount of income you don’t have to pay tax on; for the tax year of 2020/21, this amount is £12,500.
You will start to pay tax on everything above that. This doesn’t mean you don’t have to declare your earnings to HMRC if you make less than £12,500. On the contrary, on your self-assessment return, you must include all the money you made while in self-employment. If you make under £1000 in a tax year, then you don’t have to register for self-employment or pay taxes.
You will pay the following tax rates in each tax band:
- 20% – basic rate – £12,501 to £50,000
- 40% – higher rate – £50,001 to £150,000
- 45% – additional rate – over £150,000
You don’t have a personal allowance on taxable income over £125,000.
When it comes to National Insurance contributions, you have to pay:
- Class 2 if your profits are £6,475 or more a year (£3.05 a week)
- Class 4 if your profits are £9,501 or more a year (9% on profits between £9,501 and £50,000 and 2% on profits over £50,000)
You must also register for VAT if your turnover is more than £85,000. Some consultants won’t wait until they reach this threshold and prefer to register immediately, although it’s not mandatory to do so.
As a freelancer consultant, your income tax and National Insurance contributions are not taken automatically from your monthly wages by an employer, which means you need to pay them yourself. Figuring out how much tax you will have to pay HMRC means you won’t get caught unawares and slapped with a surprise bill you weren’t counting on.
So, make sure that you budget accordingly, as you want to have enough money for this instead of scrambling last minute trying to figure out how to afford your payment. HMRC offer a calculator that can help you to budget for your self-assessment tax bill if you’re self-employed.
Gorilla Accounting are sole trader accountants, so don’t hesitate to talk to us if you’d like to learn more about paying taxes when you’re a freelance consultant.
Managing Taxes as Limited Company
If you prefer to set up a limited company, be it because you’re already a sole trader but your business is growing and it will be more tax-efficient to do it, or because you want the prestige that comes from owning your own company, we can help you manage your taxes.
When you choose to operate as a limited company, you must pay corporation tax on its annual profits. After all, companies are separate legal entities to the individuals who own and manage them, so they have to pay taxes on profits. As you’re employed by your company, your company pays your salary.
For the tax year of 2020/21, the main rate for corporation tax on all profits is 19%. Whether you create the return yourself or ask a professional accountant to do it, the important thing is that your paperwork is correct and on time.
Again, if your turnover is over £85,000, you have to pay VAT as well. You have to register for VAT within 30 days of your business’ turnover exceeding this amount.
You must register for PAYE for your company if you’re drawing a salary as a limited company consultant. Some contractors pay themselves a small salary in order to avoid paying a lot of National Insurance contributions, and draw the rest as dividends.
If you receive a salary from your company, you have to pay Class 1 National Insurance. Employees pay contributions of 12% on income that falls between £183 and £962 a week, and of 2% on income above £962 a week.
As for your dividend tax rates, in the current tax year of 2020/21, the values are:
- £2000 tax-free – There is no tax to pay on the first £2,000 received.
- 7.5% – basic rate – paid on taxable income over the personal allowance to £37,500.
- 32.5% – higher rate – paid on taxable income over the personal allowance from £37,501 to £150,000.
- 38.1% – additional rate – paid on taxable income over £150,000
Other taxes that you will have to consider when operating as a consultant through your own limited company are payments on account. You may have to make payments on account towards the following tax year as well. This can be a little daunting to figure out, so it may be better to ask for professional help to ensure that you’re doing everything well.
You must also consider capital gains tax, as you may have to pay this tax on assets you disposed of during the relevant tax year. It doesn’t matter if it’s property or shares, you’ll have to pay it.
As a consultant, you provide your clients with specialise knowledge and advise, and we do the same at Gorilla Accounting. Our all-inclusive package is just £95 + VAT a month and, with it, comes 24/7 access to FreeAgent accounting software, you own dedicated accountant, and many other benefits.
If you’re looking for limited company accountants capable of helping you manage your taxes and accounts for you, you’re in the right place. We take the hassle out of accounting by doing everything for you, leaving you with time to focus on your consulting business.