Bookkeeping for the Self employed – what you need to know!

Jan 29, 2016

So WELL DONE – you have taken the plunge and set up on your own!

If the accounts side of being self employed is all a bit of a mystery to you, here’s a basic guide to get you started!

Things to Do Straight Away:

1. Register with HMRC – you can click here to do so.  This tells HMRC you are self-employed and means they will ask you to complete a tax return.  You need to do this within 3 months of starting your business.
2. Set up a separate bank account.  This can just be another current account but it’s really important to keep your business income and costs separate from your personal money.  You might want to set up another account as well where you can put money aside for your tax bill.
3. Buy a couple of folders (and keep the receipt!)

What Records do I need to keep?

You need to keep records of your sales and costs.  You won’t need to send these to HMRC but you need to keep them so you can work out your profit or loss for your tax return, and show them to HMRC if asked.

There are many ways you can keep your records, ranging from pen and paper to accounting software and the key is to choose one that suits you.  If you don’t get it – you aren’t going to keep it up to date!  For a lot of start-ups and freelancers– a simple excel spreadsheet will suffice in the early days so that’s what I am going to concentrate on here.

Sales:

Keep a copy of every invoice that you send out (paper or electronic).

Keep a record on a spreadsheet of all invoices raised – noting the date it was issued, the number (keep these sequential), who it was to and the amount.  Have a final column where you note the date the invoice is paid – perhaps in a different colour so it stands out!  You can then easily see who owes you money and how long the invoice has been outstanding – so you can get chasing!

Expenses:

It’s really important to keep track of what you are spending.

Try to pay for everything related to your business directly from your business bank account – this will make recording expenses so much easier.  Some things you will have to pay in cash (parking etc) but wherever possible use your business account debit card.  Even in Tesco if you are buying bits of stationery, pay for this separately to your weekly shop, or you will probably forget you bought it and you won’t claim it against the business.

Keep a spreadsheet of your expenses.  It’s a good idea to have one spreadsheet or tab for all costs that you have paid for from the business account and another one for cash payments.  Your spreadsheet should note the date, the supplier name and the total.  It should then break down the amount into categories so you can keep track of what you are spending – the categories can be whatever you like and what will be useful for you – but might include post, stationery, travel, parking, website, networking, subscriptions etc. Don’t forget to include a category for money that you have taken out of the business for yourself, as you will need to “pay” yourself at some point!

Keep the actual receipts for your expenditure in a folder – filing them by month is a good idea and for the super organised, number them and cross reference them to your expenses summary spreadsheet, so when your accountant queries something you can find the receipt quickly!

Other Costs

If you use your car for business then the simplest way to charge the business for this is to recharge the mileage.  The business can pay you 45p per business mile – so you need to keep a record of the business mileage that you do.  You might chose to keep a notebook/diary in the car to keep a log, or to keep a spreadsheet but somewhere you need to keep a record of the business miles you have done.  Every month, or quarter, total this up and repay the amount due to you from the business account – not forgetting to note it on your expenses summary!

Keep a record of your mobile phone bill and internet costs as you can also reclaim a percentage of these from your business.

Bank Accounts

Print out your statement when you get it and file it in your folder.  Check the items on your bank statement to the income and costs on your summary and make sure you have everything recorded.

When you are paid by a client, it’s a good idea to put a percentage of this aside into your “tax” bank account to save for you tax bill – the amount you need to put aside will vary depending on your personal circumstance, but between 20 and 30% as a guide.

If you follow these basic steps then you are well on the way to having a good accounting system.  Try to keep this up to date – there is nothing worse than sitting down to catch up the last 6 months!

Many accountants will have a template they use for their clients – contact me by email if you would like mine.

Tax return season is nearly over for another year (phew!) and accountants everywhere will be collapsing in heaps, wondering why they thought “dry January” was a good idea and making mental notes that next year will be better!

But how was it for you?

If you did it yourself, could you find what you needed?  Or had a few receipts gone through the wash in your jeans (shame it wasn’t a lottery ticket eh!)

It doesn’t have to be this way. Follow some simple steps below and next year will be a breeze!  All it takes is a bit of organisation.

• Buy yourself a nice folder or document wallet (nice stationery always helps, and it’s tax deductible!)
• Make a note on the front of your UTR, NI number and government gateway details
• File documents in there as they arrive through the post or via email.  P60’s and P11D’s are often emailed to employees now – print them out and put them in the folder when you get them so you aren’t trawling through emails next New Year or hassling your payroll department for copies!
• If you receive any dividends in the year – you will get a dividend voucher when the dividend is paid – file it when you get it.
• The same goes for bank interest – if you are lucky enough still to get bank interest – then you will get a “certificate of tax deduction” from your bank – or you can download one.  Print it out and pop it in the folder.
• File any other tax related items as you receive them – if in doubt – file it!  Far easier to realise you didn’t need it when you come to do your return, than be turning drawers out trying to find it.
• If you have bought or sold shares in the year, you will need those details so keep the contract notes in the file.
• Have a buy-to-let?  A separate section of the file will be needed to keep the receipts from B & Q, for the plumber who popped over, and for the mortgage interest statement your provider will send you.

Then when you pluck up courage next year to get your return done (pre Summer hols – NOT in January 2017!) everything you need will be to hand and you will wonder what all the fuss was about.

If you are self employed then you will need to have all those documents as well – but that’s for another blog!

For most people, the nightmare of doing your tax return is trying to find the information you need – but with a little bit of organisation, you can make next year a relatively pain free experience.

If you do need some help with your tax returns, all nice folders will always be welcome with me at Wilkins & Co

Claiming Expenses for the Self Employed

Jan 17, 2016

This is a guest blog written by Helen Watson (@hellohelenw), social media manager in training with Digital Mums. 

I’ve spoken to Rosie to get an overview of what you need to know about claiming expenses. (This blog refers to sole traders, there are some differences for limited companies.)

Why do I need to record my expenses?

To keep accurate records about your business, to see if you are making any money and to ensure that you are paying the correct amount of tax. It is important to know where you costs are, so you can budget and price correctly! Anything that is “wholly and exclusively” used for your business should be claimed as an expense. This will reduce your profit figure and therefore your tax bill.

What can I claim for?

Any expenses that you genuinely incur in running your business.  Common examples: stationery, advertising, accountancy fees, staffing costs, raw materials, membership fees (of professional bodies, not gym memberships!)

Some items will be dual purpose, for business and personal usage. One example of this is a mobile phone which is used for business and personal calls.  In this case you would work out the percentage of business and personal calls and apportion the costs accordingly.

Other dual purpose items can be claimed according to a set formula. One example of this is a car. You can choose to claim 45p per mile for business mileage (25p after 10,000 miles) rather than adding up the costs of running your car (insurance, petrol, repairs, etc) and apportioning that. Most small business owners claim mileage as this is more straightforward, although it is crucial to keep a log of your business mileage.

What is business mileage?

Travelling for business, but not commuting. If a self-employed hairdresser travels to the same salon every day, this is not business mileage. A mobile hairdresser who travels between client’s homes is doing business mileage. Parking and speeding fines can not be claimed as expenses! 

What if I work from home?

You can claim for the expense of using your home to run your business from. There is a flat rate that can be used providing you are working from home for more than 25 hours per month.  The alternative is to work out the running costs of your home, calculate how much of your home you use for your business and factor in the time you spend running the business, then claim the appropriate percentage of the costs as expenses.

What about my work clothing?

Only clothing that is “protective” or a uniform can be claimed as an expense. You cannot claim for general clothes, even if you have bought them just for work. If you are working on a building site, wearing a jacket that you would only wear to work as it gets dirty, you cannot claim this as an expense.  However, if the jacket had your business logo on, then this would be advertising your business and would be allowable.

What records do I need to keep?

It is crucial to keep good records. If HMRC investigate your tax affairs, you need to be able to evidence your expenditure. Having separate business and personal bank accounts will make things much easier. Keep all your receipts, especially if you have paid for things in cash.

Do I need accounting software?

If you have a limited amount of transactions a month a simple spreadsheet will suffice. Any more than that and accounting software can be really useful. Rosie recommends KashFlow, you will have to pay (from £10 per month) but it will streamline your record keeping, and save you time, so definitely worth considering.

Need more information?

I’ve briefly covered some of the most common expenses for small business here. If you would like some more information, please contact Rosie Forsyth.

How do the New Dividend Rules affect the owner of a small company?

Jan 10, 2016

You will, no doubt, have heard much moaning about the new dividend rules that come in from 6 April 2016 but do you know how they affect you?

Many of my clients are owners of micro businesses, operating as a limited company; often on their own, or with their partner as fellow director and shareholder.  They have taken their money out of the company in the most tax efficient way – minimum salary and then a dividend payment up to the basic rate threshold – because that’s what their accountant told them to do!

How do the new dividend rules affect them?

From 6 April 2016, the notional tax credit attached to dividends is abolished ( dont worry if you never really knew what it was – it kept us accountants crunching numbers and usually meant that you didnt pay any additional personal tax on dividends you took out of your company)

Instead, a £5,000 dividend tax allowance is being introduced.

Any dividend you receive on top of this will be taxed – at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers.

So for a typical client of mine this will be the effect:

They will have a salary of £11,000 in 2016/17 (up to the personal allowance) and then dividends of £32,000 (the basic rate threshold)

Instead of paying no personal tax, as they would have done this year, their salary will be covered by their personal allowance; they will receive a £5,000 dividend allowance against their dividends and the remaining £27,000 will be taxed at 7.5%, which is £2,025.

If husband and wife have been drawing salary and dividends in the past, then they will be £4,050 worse off under the rules.

Not surprisingly this is hugely unpopular and over 100,000 have signed the petition against it.  The changes have been introduced to close the gap between the tax regime for those operating through a limited company compared to being self employed – and certainly the tax benefit of incorporating has been reduced.

What should you do?

Ensure you pay the maximum dividend you can before 5 April 2016 up the basic rate threshold.

Consider company pension contributions and other tax efficient ways of extracting money from the company.

I will be talking to my clients in the next couple of months to ensure we do all we can to make sure they are as tax efficient as possible in this tax year.

If you would benefit from some further help , then please contact Rosie Forsyth