Tax and self employment

You may be allowed to wear pyjamas at your desk, but that won't fool the taxman. Here's a starter guide to managing your moolah.

What are my responsibilities?

Unlike the nine-to-fivers, any money you earn as a self-employed person (or freelancer) will not have any deductions taken from it. So don't be tempted to blow what looks like an inflated pay cheque because you are still liable for tax and national insurance contributions, possibly also business rates (and a pension, should you choose to invest for the future).

Every year you need to fill out a Self Assessment form and send it to HM Revenue & Customs (HMRC). If you're calculating your own tax, the deadline is January 31, but you can send it in earlier (by September 30) and they will calculate how much you owe. If you have any questions about filling out your Self Assessment forms check out TheSite.org's Self Assessment FAQ.

If you've got this far and you're freaking out, consider hiring a tax accountant. Not only can they help to manage your financial affairs, they could also keep your tax liability to a minimum (for a fee, but it's tax deductable). You can find an accountant just by looking through the phone book, but to ensure a high standard of conduct make sure they're recognised by the Association of Chartered Certified Accountants (ACCA).

So I still have to pay tax?

If you've quit your real job for a life of leisure self employment, you need to inform your local tax office. Once you've registered, they will normally send you a tax return every year (in which you detail your income and expenditure). Effectively, this means you won't be asked to pay tax for 12 months, but that demand will arrive one day so be sure you have the money available.

How much tax will I owe?

Much will depend on your tax bracket, which means you'll be liable for a percentage depending on your income. Check out the breakdown for 2008/2009:

The first £5,435 is tax free, after that you're taxed at the following rates:

• £0 - £36,000 at 20%;
• Over £36,000 at 40%.

Can I bring down my bill?

The good news is that you are entitled to deduct certain expenditure from your income - basically the stuff that relates to your business. For example, a self-employed film critic might claim for cinema tickets and movie review magazines, plus computer and printing costs, not to mention the cost of heating and lighting the office. You need receipts for all these things, of course, so start collecting/itemising everything you spend. What you can claim often comes down to common sense (new undies would be pushing it), while some items may only be allowable as a percentage (i.e. 10% of your electricity bill if your *office* is a room in your flat). Once again, this is where an accountant can come in handy.

What about National Insurance Contributions (NICS)?

These are payments you make on a regular basis that qualify you for certain types of social security benefit (such as sickness or maternity benefit, as well as the state pension). Everyone over 16 must make contributions until they retire, and if you're self-employed you must take responsibility for this.

Do I have to charge VAT (Value Added Tax)?

If you're earning £67,000 or more, you are legally required to become VAT registered and charge VAT on anything you earn. This means adding 17.5% of the amount you're charging for work carried out, which you then pass on to HM Customs & Excise every three months. At the same time, you are also entitled to claim VAT from certain goods and set that against what you owe. It means the VAT man gets his money, while you get to keep a bit back for being the middleman. You can also choose to register VAT even if you're not earning more than the threshold, but this is subject to certain conditions. To find out more read TheSite.org's factsheet on VAT.

Do I have to pay business rates?

This can apply to anyone who uses a property for business purposes. Much depends on the kind of work you do, and can affect your insurance, too. For example, jotting notes at the kitchen table isn't likely to cost you a penny, but if you're renting a premises, or your entire home has been transformed into a tie-dye factory, then be prepared to pay.