The UK is facing a serious cost-of-living crisis. It's being driven by eye-watering utility bill increases, rocketing fuel pump prices and record inflation that's making the weekly supermarket shop and other purchases far more expensive. Moreover, interest rates are increasing, with more hikes expected, while take-home pay isn't increasing anywhere near in line with inflation.

Many people are already having to cut back to get by, and that includes the nation's 3.5 million sole traders, the unsung heroes of the economy who make up 59% of the total UK business population (5.9m), as well as the 405,000 people (7%) who run ordinary business partnerships.

Caution is advised when cutting costs, because if you cut them too much or in the wrong places, it can damage your sole trader business. But sole traders can potentially make savings in most if not all areas – and that includes tax. That doesn't mean doing anything illegal, of course, but just finding ways to minimise your tax bill and limit your tax-management costs. So, how might you save money on tax when you're self employed?

1. Claim all of your allowable expenses

If you've been running your sole trader business for some years, you've probably already claimed allowable expenses via your self assessment tax returns. These are costs generated "wholly and exclusively" to operate your sole trader business. You deduct these from your income so that you're taxed solely on your profits.

Do some research to find out whether you're claiming all of your allowable expenses. Government website GOV.UK is a great starting point to find out more about allowable expenses.

How might you be missing out? If you run your sole trader business from commercial premises or supply services at your customers' homes, you can claim allowable expenses for operating a small home office for after-hours admin work. Make sure you also claim for all eligible business mileage costs. You might be paying for things which could be claimed as an allowable business expense. Even small expenses such as postage stamps or a daily pint of milk mount up over the year.

GoSimpleTaxWant to file your self assessment tax return early?

If you’re self-employed, a sole trader or have income outside of PAYE, file your self-assessment direct to HMRC and get hints and tips on savings along the way. GoSimpleTax does all the calculations for you saving you ££s in accountancy fees.

Register here for your 25% discount

2. Make Marriage Allowance work for you

You're probably already claiming your Personal Allowance of £12,570 a year, which is the amount of income you can earn tax-free if your net income is below £100,000. But if you're married or in a civil partnership, find out about Marriage Allowance. It could reduce how much tax you or your partner pays if you or they are a basic rate Income Tax payer (ie income of £12,571-£50,270 – 2022/23 tax year).

The Marriage Allowance enables a partner who is earning below £12,570 a year to transfer 10% of their Personal Allowance to their higher-earning partner, which equals £1,260 and offers a potential tax saving of up to £252 a year.

Visit GOV.uk for more information on Marriage Allowance.  

3. Lower your "payments on account"

Most self-employed people pay their Income Tax in two advance payments, one in January and the other in July, with payments based on the previous year's tax bill. However, if your earnings for this tax year will be lower, you can reduce your payments via your Government Gateway online account or by sending a completed SA303 form to HMRC. Otherwise, you'll pay more and have to wait for a refund from HMRC.

4. Get tax relief on your pension contributions

Private pension contributions paid into HMRC-registered private pension schemes are tax-free up to set limits. You'll only pay tax if the value of your pension pot goes above 100% of your earnings in a year or is more than £40,000 a year. 

As explained on the government's Money Helper website: If you're a basic-rate taxpayer, the government will add an extra £25 for every £100 you pay into your pension. If you pay enough tax at the higher rate of 40% in England, Wales or Northern Ireland, you can claim back a further £25 through your tax return for every £100 you pay into your pension. In Scotland, you can claim an extra £1.58 for every £100 paid if you pay enough tax at the Scottish Intermediate Rate of 21% [and] a further £26.58 if you pay enough tax at the Scottish Higher Rate of 41%.”

Visit the Money Helper website for more on pensions for self employed people.

5. Donate to a charity

They're not only a great way to make a positive difference, but donations to charities or community amateur sports clubs are also subject to tax relief. Donations made through Gift Aid enable charities to claim an extra 25p for every £1 you give, as long as you make a declaration vis a Gift Aid form. Donations will qualify and long as they're not more than four times what you've paid in Income Tax or Capital Gains in that tax year. If you pay tax above the basic rate of Income Tax, via Self Assessment, you can claim the difference between the rate you pay and basic rate on your donation.

Visit GOV.UK for more information on tax relief when you donate to a charity.

6. Claim for previous tax return mistakes or trade losses

If you've made mistakes in tax returns in the past four years, for example, by not claiming for all of your allowable expenses, you may be able to claim a refund for overpaid tax. You write to HMRC to tell them you want to claim overpayment relief. You must include proof that you've overpaid tax through Self Assessment and sign a declaration confirming the accuracy of the new details you've provided. Obviously, you must not wilfully make invalid claims.

COVID meant that many sole traders made a loss in recent years, with some unable to claim government support. If you're among them and you haven't already done so, you may be able to offset a loss against profits made in subsequent years, which will reduce your next tax bill.

Visit GOV.UK for more on claiming loss relief when you're a sole trader

7. Do your own self assessment tax return

If you're currently paying an accountant to complete your self assessment tax return, doing it yourself could save you a few quid. For a lower price (£50 or so), software can make completing your own self assessment tax return cheaper, quicker and easier, with the software providing prompts to help you enter the right figures in the right place. Such software also comes with customer support. 

Other ways to save money and pay less tax

Transferring ownership of assets to your spouse or civil partner can shield you from Capital Gains Tax. You do not pay Capital Gains Tax on assets you give or sell to your spouse or civil partner, providing you live together and their business doesn't sell them. They may have to pay tax on any gain if they later dispose of the asset.

You may also benefit on savings and investments. The Starting Rate for Savings supports savers on the lowest incomes, as you don't pay tax on up to £5,000 of interest from savings. The Personal Savings Allowance also enables tax-free 

earnings. Basic rate taxpayers get a £1,000 tax-free allowance, while higher rate taxpayers get £500 (additional rate taxpayers get nothing). Tax-free ISAs (Individual Savings Accounts) could be another option.

If you rent out a spare, furnished room in your home, the Rent-a-Room Scheme enables you to earn up to £7,500 a year in tax-free rent. And under the Tax-Free Childcare scheme, parents can claim back 25% of their childcare costs up to £500 every three months, as long as they earn less than £100,000 a year and the child is under 11. You'll need to set up an online childcare account, then for every £8 you pay in, the government will pay in £2 that you can use to pay your childcare provider. You can get Tax-Free Childcare and 30 hours free childcare if you're eligible for both.

A penny saved…

Finding ways to save on tax can take effort, but the results make it worthwhile, with every penny saved a penny earned. Lowering your costs wherever possible increases the chances that you and your sole trader business will weather the current financial storm and come out stronger on the other side.

Sponsored post. Copyright 2022. Featured article by Mike Parkes of GoSimpleTax - tax return software that can help you manage your self assessment.

Ten things you need to know about VAT invoices

Need to register for VAT and start providing your customers or clients with VAT invoices? You must ensure that they contain all of the necessary details if they're to be acceptable to HMRC. You may need to know how to produce VAT invoices for sales to international clients and when to send your VAT invoices.

You can register even if your taxable turnover isn't above the VAT registration threshold of £90,000 a year from 1 April 2024 (previously £85,000), which enables you to reclaim VAT on things you buy for your business. The government website GOV.UK explains how to register for VAT.

Here are ten key facts you should know about VAT invoices.

1 You must be registered for VAT to issue VAT invoices

You can only issue VAT invoices once you are registered. They can be in paper or electronic form, but you must retain copies of all VAT invoices you send to your clients or customers – even if you cancel them or make a mistake when you produce one and need to send a replacement. You must retain copies of all purchase VAT invoices that you're given for things you buy for your business. Without these, you are not allowed to claim back the VAT.

2 A VAT invoice is not always needed

You're not required to issue a VAT invoice if:

  • your invoice is only for exempt or zero-rated UK sales
  • you're gifting goods
  • you sell goods under a VAT second-hand margin scheme
  • your client or customer operates a self-billing arrangement.

3 To reclaim VAT, you need a VAT invoice

You can't use an invalid invoice, pro-forma invoice, statement or delivery note to try to reclaim VAT, it must be a bona fide VAT invoice provided by your supplier.

4 You don't always have to send a full VAT invoice

For most transactions, you will send a full VAT invoice to your clients or customers. Alternatively, you can send a:

  • "modified invoice" for retail supplies costing more than £250 or a
  • "simplified invoice" for retail supplies below £250 (and other supplies after 1 January 2013)

5 Full VAT invoices must contain certain information

If you need to send a full VAT Invoice, it must include the following:

  • a unique VAT invoice number that follows on from your previous VAT invoice
  • your business name and address
  • your VAT number (it begins with the letters GB and is followed by nine numbers
  • date
  • tax point or "time of supply" if this is different to the invoice date
  • the customer's name/trading name and address
  • description of the goods or services supplied
  • total amount excluding VAT
  • total amount of VAT in GDP
  • price per item excluding VAT
  • quantity of each type of item
  • discount rate per item if applicable
  • VAT rate charged per item (if something is exempt or zero-rated you should make it clear that no VAT has been charged on these items).

A modified invoice is similar to a full invoice, but it also includes the VAT inclusive price of products/services and the total amount including VAT.

6 Simplified invoices need less information

If you issue a simplified VAT invoice, you only need include:

  • a unique VAT invoice number that follows on from your previous VAT invoice
  • your business name and address
  • your VAT number
  • tax point or "time of supply" if this is different to the invoice date
  • description of the goods or services supplied
  • VAT rate charged per item (if something is exempt or zero-rated you should make it clear that no VAT has been charged)
  • Total amount including VAT*.

*If items are charged at different VAT rates, this should be detailed for each.

7 Payment dates and amounts matter for 'cash accounting'

If you use 'cash accounting' (ie a financial record-keeping/bookkeeping method where revenues and expenses are recorded on the date they're received or paid, not when they were incurred), you must stamp a VAT invoice with the amount of cash paid and the date.

8 There are invoicing time limits

VAT invoices must usually be issued within 30 days of the date of supply or payment (if your business is paid in advance).

9 Rules are different for foreign currency invoices

You do not have to show all amounts on your invoices in sterling. If you issue VAT invoices in a foreign currency or language, you must:

  • show the total VAT payable in sterling on your VAT invoice if supplied in the UK
  • provide an English translation of any invoice within 30 days if asked to do so by a visiting VAT officer.

10 There are different options when converting foreign currency invoices to sterling

To convert to sterling when producing a VAT invoice you can:

  • use the market selling rate at the time of supply
  • use the European Central Bank's rate
  • use HMRC's period rates of exchange (the rates usually remain the same for each calendar month)
  • apply to HMRC to use a different method to account for the VAT.

As the second series of the Start Your Own Business podcast draws to a close, we decided to look back and consider what we’ve learnt from this series' expert guests.

On everything from sales to tax and marketing to mental health, our team of wonderful experts have dug deep to offer their top tips on some of the key topics that affect most small businesses.

1. “Offline marketing is far, far cheaper than digital marketing” 

Tony Dowling of Real Inbound Marketing gave us a masterclass in getting the best results from marketing offline. In recent years, there has been a massive emphasis on marketing online and through social media when it comes to reaching new customers and increasing visibility. However for small businesses just starting out, marketing online can be costly, but many can still benefit from cheaper forms of offline marketing such as word-of-mouth, face-to-face networking, as well as newspaper, magazine and media advertising

The type of business you run will have a big effect on what type of marketing works best for you. For example, if you have just started a local handyman service, you may be better off posting leaflets around the area, or placing an ad in a local magazine, than you would advertising on google. This would prove cheaper and maybe a more effective way of reaching your audience. Try to find out as much as you can about your ideal customer, so you can adapt your marketing strategy to best target them.

Listen to ‘How to attract more customers by making offline marketing work for you’ here.

2. “If you’re not getting any orders, you know you need to change something”

Grasmere Gingerbread is a highly successful Lake District small family business dating back to 1854. Even the oldest or most successful businesses shouldn’t be afraid to adapt and change to suit customer needs or the current climate. Despite the fact you may be doing all the right things, if you’re not receiving any orders then there is something wrong. Yasmine Hunter, Head of Marketing at Grasmere Gingerbread explains how the small family business took steps to take selling their delicious wares online. This proved to be a good decision and they are now shipping from the Lake District to around the world. 

Listen to ‘How Grasmere Gingerbread started selling online’ here.

3. “Stress is roughly 57% of all long-term sickness absences”

Sir Cary Cooper is the 50th Anniversary Professor of Organizational Psychology & Health at the Alliance Manchester Business School at the University of Manchester. He is co-founder of the Robertson Cooper mental health, resilience and wellbeing consultancy, and has been described as the UK media’s first-choice expert for comment on workplace issues.

Sir Cary Cooper shared practical advice on how you can manage stress and overcome disappointments when running a start-up or small business. Cary teaches us the importance of looking after your staff and their wellbeing, but also how caring for your employees can improve staff retention, business atmosphere and reduce staff absences. 

Listen to ‘How to deal with stress and setbacks’ here.

4. “There is quite an extensive list of expenses you can claim”

Tax expert, Mike Parkes Technical director at GoSimpleTax explains how many small business owners aren’t claiming their full allowable expenses, resulting in them overpaying on their tax bill. He taught us several things, the importance of keeping good records, the penalties you may face for getting things wrong and the types of expenses small business owners can claim, including those related to operating a business from your home, utility costs, travel and vehicle costs, buying tools and equipment, etc. Mike also warned of the problems sole traders, freelancers and small business owners can get into with HMRC for claiming for costs they are not entitled to.

Listen to ‘What allowable expenses can sole traders claim?’ here.

5. “Actually building your website is just stage one. Actually getting people to find it is stage two and the quickest way to do that is through advertising”

With about £10.5bn being spent on digital advertising in the UK in the first half of 2021 alone, it’s clear there is a big market for digital marketing. Charlotte Sheridan, a.k.a The Small Biz Expert sat down with the Start Your Own Business podcast to provide essential advice on how to advertise on Google, Facebook and other sites. Charlotte was quick to point out that the hard part, is no longer coming up with a brand and building a website, but standing out against the competition and actually getting your site to appear in searches. Paid search makes up 36% of UK digital advertising spend, followed by digital display on 27%, so many businesses are making digital advertising a priority. 

Listen to ‘How to win customers with digital advertising' here.

6. “Most people's perception is, it costs you lots of money to go green, and it doesn't”

According to research from FSB, although most small firms are concerned about climate change, only one-in-three have actually made a plan to help tackle it. Graham Oakley, Managing Director at multi-award-winning Clear Three got his laundry service business to net-zero, so has first-hand experience in the cost and commitment that goes into going green. Graham spoke about the importance of making small changes and building these greener choices into the culture of the business. 

Although you may have to invest more upfront, many greener business options will save money in the long run. Reducing waste, pollution and misuse of natural resources can help your business become cleaner, greener, more efficient and more profitable. Of course, businesses vary, but there is always something your business can do to make a difference. For some, it's finding ways to reduce waste, installing more energy-efficient equipment or even buying stock and supplies from an eco-conscious supplier.

Listen to ‘How Clear Three made their business carbon neutral’ here.

7. “It's really important to develop your staff” 

Leading employment law expert and solicitor Hannah Thomas spoke to us about how to steer clear of legal problems when hiring and managing staff. Developing and training staff is a key factor in staff retention and happiness. If your small business starts growing, at some point you’ll have to think about hiring some help. However, Hannah stressed the importance of keeping good records during the recruitment process, management period and after any dismissals.

Listen to ‘Don't break the law when recruiting and managing staff’ here.

8. “People start to sell too early”

Glen Williamson provides practical advice on how to be more successful when selling in person. As a consultant sales director, sales trainer, speaker and accredited master coach at Kiss The Fish Ltd, Glen works with sales professionals and SME business owners to help them to reach new heights of sales performance.

Many sellers make the mistake of jumping straight into a sale which can ultimately lead to scaring potential customers away. Glen emphasised the importance of getting to know your customers and listening to their needs. This can also be applied to online selling. You can use website analytics and research to help you get to know your client base and therefore improve how you are able to connect and market to them.

Listen to ‘How to succeed when selling face-to-face’ here.

Copyright 2022. Post written by the Sarah Bonehill, Donut blog team.

Noise complaints from neighbours are a common occurrence for many business owners. It can be difficult to decide how best to deal with a complaint without escalating the situation and ending up on the wrong end of nuisance litigation.

A noise complaint can put a business at risk, and they have become particularly pertinent issue since the emergence of COVID-19. This is largely down to businesses seeking new ways to create or expand their outside spaces. The Government has supported such moves by announcing that pavement licences are being extended for another year.

Noise can come from many sources, but it is more likely to be an issue for hospitality and leisure sector businesses. This is due to the "entertainment" value they bring to customers. Noise can be caused by background music, DJs, and general chatter and excitement from customers enjoying their leisure time or finding their way home at the end of the night. Other general business noises such as deliveries and refuse collections, and smells such as kitchen and food smells or smoke, can also lead to complaints, particularly if they occur during unsociable hours.

What noise can lead to a complaint?

Any noise created by your business or as a result of your business can potentially lead to a complaint. Unfortunately, there may be times when, despite your best efforts to reduce disruption for neighbours, you may still have to deal with a complaint.

If you own a business with surrounding neighbours, you might receive a noise complaint in a number of ways. The best-case scenario will be an informal approach from the neighbour with a request to remedy the issue. If this happens, it may be possible to resolve the issue relatively easily. This might be done by training staff on ways to minimise noise, moving your entrance so that noise from people coming and going is reduced, or changing the location of the smoking area. Steps like these could resolve the issue, preventing the neighbour from taking further action. If this happens, solicitors will tend to not be involved.

Alternatively, your neighbour go straight to the local council to make their complaint. In this case, you are not given the opportunity to remedy the issue. You might not even be aware that there is a problem until later down the line. In the worst case scenario, your neighbour could also contact the local press or make negative comments on social media platforms, resulting in bad publicity for your business.

Policies from local authorities

Most local authorities have informal processes in place, which they use before proceeding with formal action. These include "traffic light" systems, panel meetings, or mediation (although the latter is less readily available due to budget cuts). However, it is important to note that the council may quickly resort to formal action without any notice. This could include measures such as forcing you to limit capacity, employ door staff, reduce your opening hours, or other measures which might make operating your business more difficult.

The local authority also has the power to suspend your licence, revoke your pavement licence, or issue noise abatement notices. You can be prosecuted if you subsequently breach a noise abatement notice. Therefore, you should take steps to deal with the complaint as soon as possible.

How can a business respond to a noise complaint?

Regardless of how the complaint is made (informal or formal), you must take it seriously. If the neighbour intends to pursue the matter, they are likely to be compiling evidence of all the issues they wish to complain about.

As soon as you become aware of a potential problem, start a diary or log of what has happened, when, and what steps you have taken to address the issue. It may also be useful to speak to other business owners in the area. You could also lobby parties such as your local MPs and councillors to get support. The noise only needs to affect a small percentage of people to be considered a public nuisance. A neighbour can also pursue a claim for private nuisance, which is treated differently in law to public nuisance.

You may be in the position where a neighbour is pursuing what you consider to be a vexatious claim. Should this happen, you should seek advice at the earliest opportunity. The local authority will usually assist you. It might be worth appointing a sound acoustician to conduct a noise impact assessment and implementing a noise management plan. This will help you to put in place both interim measures and finding a longer-term solution.

From a litigation perspective, you are likely to require input from an expert if you find yourself having to defend a claim. This will also show the court that you are taking the complaint seriously and are attempting to sort the issue.

With Summer around the corner with warmer weather and longer days, many customers will want to socialise in outdoor settings. Many businesses have adapted and expanded their outside seating areas to respond to these demands. This will inevitably increase the likelihood of noise complaints from neighbours.

Should you have concerns regarding potential complaints or have been made aware of noise or other complaints by a neighbour and are concerned about its effect on your business, you can contact the Hospitality & Leisure Team at Myerson Solicitors.

Copyright 2022. Article was made possible by Gemma Symons, a Solicitor within the Dispute Resolution Team at Myerson Solicitors.

How to register a business name

Whether you set up as a sole trader or a company, registering your business name is a key part of complying with regulations, establishing your brand and protecting your business for the long term

Choosing a business name can be a fun part of setting up a business but it is not without its challenges. Before you commit to a business name, you'll need to check if anyone is already using that name or something very similar. It's also important to do a trade mark check to make sure no-one has trade marked your business name already; even if they are not registered as a company this could cause problems in the future. Finally, you need to ensure that your business name is available as a domain name so you can get the web and email addresses that you need.

Many would-be business owners worry about registering a business name. If you incorporate (ie form a private limited company), you cannot register a business name that is already in use. Furthermore, only private limited companies can use the term Limited or Ltd in their names. You can use the Companies House name availability checker to make sure the company name you have chosen is available.

Before you register a company name with Companies House, you must also ensure that your business name complies with government rules. Some words cannot be used unless you've been granted official permission. These include words suggesting the business is of: national importance (eg British); special status (eg association); a particular function (eg trust) or a specialist activity (eg health centre). Never use swear words or other terms that might offend.

Sole traders or those in partnerships have the option to trade under their personal names or trade under a business name but they don't need to register the name with Companies House. However, if your business name causes customers to confuse your business with another you could be guilty of "passing off", which is an offence. It is far better to make your business name distinct - search for your preferred business name online to see if there are others using a name like yours.

How to register a limited company

You can register your company with Companies House online, by post, using an agent or using third-party software.

You'll need three pieces of personal information about yourself and your shareholders, such as National Insurance number, passport number or mother’s maiden name. You will also need to appoint at least one director and their name and address will be published on the Companies House website.

You need three documents to register a company:

Once you’re registered your company, you’ll get a Certificate of Incorporation with your company number on it and the date of its formation. Online registration takes 24 hours and costs £12; postal applications take up to ten days and cost £40. You can use the company registration process to register for Corporation Tax and PAYE at the same time.

How to register your business as a sole trader

There's no need to register your business with Companies House if you are self-employed but you will have to register with HMRC; all you need is your National Insurance number. If you are setting up a partnership, you have to register a nominated partner with HMRC who will be responsible for completing the company tax returns. If you are a contractor or a subcontractor in the building trade, you’ll also need to register for the Construction Industry Scheme (CIS).

How to register your business name as a trade mark

Registering your business name as a trade mark is not a legal requirement, but it’s a good way to protect your business name. When you register your trade mark, you’ll be able to put the R symbol next to your brand - to show that it’s yours and warn others against using it. It also means you can take legal action against anyone who uses your brand without your permission.

You can search for trade marks on the UK Intellectual Property Office’s (UKIPO) website. A trade mark can be a business name, brand name, word, logo or colour or a combination of these.

Registering for a trade mark with the UKIPO can take a few months. You’ll need a unique name for your business; you can’t trade mark generic words, such as plumber or accountant. Making up a brand name - such as Ikea or Google - can be a good way to create a distinct business name that can be trade marked.

When you register your business name as a trade mark you’ll have to choose the class or classes of goods or services you operate in - such as vehicles, alcoholic beverages or education - from a list of 45 classes known as the Nice Classification. Your trade mark will only be protected within the sectors you select.

The trade mark application process allows time for objections. The UKIPO may have concerns about how distinctive your trade mark is. Applications are also published to allow anyone to object, for instance if they have a similar business name. A registered trademark lasts for ten years. If you want to make any changes to your trade mark you’ll have to make a new application.

How to register a domain name for your business

A domain name is the main part of your website address, eg www.yourbusinessname.co.uk. Securing the right domain name will help your business to get established online. A great domain name (like any business name) is easy to remember and easy to spell. If your chosen business name is available as a domain then that’s great news; if it isn’t you may need to find a more distinct business name. Once you’ve found a domain name that works for your business, you’ll be able to use it for both your email and web addresses.

You’ll also need to choose your Top Level Domain (TLD). This is the last part of your web address such as .com (good for businesses that operate internationally) or .co.uk (best for UK businesses with a local customer base).

It’s easy to buy a domain name from a domain name registrar such as 123-Reg, Names.co.uk or GoDaddy. You can check the availability of your chosen domain on these websites and shop around for the best prices. When you buy a domain name you are paying for the rights to use the domain for a fixed period of time. Bear in mind that prices can be extremely reasonable when you first register but may go up over time.

How much tax do self-employed workers pay?

Self-employed workers have to pay income tax and National Insurance contributions on their earnings. Here’s what you need to know about tax if you're self-employed

If you work for yourself as a sole trader or a freelancer then you are self-employed when it comes to paying the tax you owe. Depending on how much you earn, you may have to pay both income tax and National Insurance contributions. If you have just started working for yourself, the first step is to register as self-employed with HMRC.

How much income tax do self-employed workers pay?

Rates of income tax are the same for self-employed workers and employees but if you work for yourself, the way that you calculate and pay the tax you owe is different. While employees pay tax as they earn under the PAYE system, self-employed workers must complete a self assessment income tax return in January every year. Self-employed tax payments must be paid twice a year - on 31 January and 31 July.

Income tax is only paid if you earn over a certain amount; this threshold is called the personal tax allowance.

What is the personal tax allowance?

In the UK, you don't pay tax on earnings under the personal tax allowance.

  • The personal tax allowance is £12,570 - and that threshold has now been fixed until 2025/26.

However, if you earn over £100,000, your income tax personal allowance goes down by £1 for every £2 earned above £100,000.

What are the UK income tax bands?

Tax payers (including the self-employed) pay income tax at specific tax rates on earnings within specific income bands. Income tax bands can change from one year to the next.

UK income tax rates and bands for 2023/24 are:

  • 0% tax on income up to the tax threshold of £12,570
  • 20% tax on earnings between £12,571 and £50,270
  • 40% tax on earnings between £50,271 and £125,140
  • 45% on earning over £125,141

How to pay less tax if you're self-employed

As a self-employed worker, you only pay tax on your profits - not on your total earnings. It means that you can deduct allowable business expenses from your income before you pay tax. These costs must be business-related.

What are allowable business expenses?

Allowable business expenses include:

  • Office expenses such as phone and internet, software, stationery and postage;
  • Stock and materials;
  • Marketing costs;
  • Costs associated with running a business from your home such as a share of utility bills;
  • Business premises, including rent, building insurance and utility bills;
  • Business travel costs including car insurance and fuel as well as train, plane and bus tickets and taxi costs. Business travel does not include costs associated with getting from home to work and back;
  • Accountancy costs, bank fees, overdraft charges and legal bills;
  • Business insurance.

The government publishes guidance on business expenses; it also offers simplified expenses schemes for self-employed workers if you work from home, run a vehicle for your business or live in your business premises.

What if self-employment is not your only income?

You have to pay tax on all kinds of income earned during the tax year. That includes any wages earned as an employee as well as any profits you make from self-employment. You also need to declare any income from pensions, rental income, trust income and interest from savings on your self assessment tax return.

How much National Insurance do self-employed workers have to pay?

Self-employed workers currently have to pay two types of National Insurance contributions (NICs) - Class 2 and Class 4 contributions.

Class 2 NICs are paid at a flat rate of £3.45 a week. However, this is only payable if you earn profits above the Class 2 threshold of £6,725 (for the tax year 2023/24). Class 2 NICs are being abolished from April 2024.

Class 4 NICs are payable on yearly profits over £9,569. Class 4 tax rates and thresholds for 2023/24 are:

  • 9% on profits between £12,570 and £50,270 (8% from April 2024)
  • 2% on profits over £50,270

Most sole traders pay Class 2 and Class 4 National Insurance contributions as part of their self assessment tax return.

Class 2 NICs will be abolished from April 2024. Class 4 NICs will be reduced by 1% at the same time.

How to get a business loan

Want to start or expand your business but don’t have enough funds? A business loan could be the answer but it’s important to find the right loan for you. Here are some of the main options

There are many ways for a small business or sole trader to borrow money. It’s important to find an appropriate lending solution that does not become a burden that you can’t manage. Never forget that borrowing could put your business or personal assets at risk.

What is a business loan?

A business loan is a way of borrowing money to help your business grow or to get a start-up off the ground. Potential lenders include high street banks, online lenders and peer-to-peer lending platforms. Business loans typically start at £1,000 and can be several million pounds. Loans can be short-term (from just a few months) or long-term (up to 25 years). Interest rates are likely to be lower if the loan is long-term but as you are repaying the loan for longer you could end up paying more.

No matter what kind of business loan you are looking for, lenders will want to know what the loan is for; they will ask to see evidence of your income as well as details of how you plan to repay the loan.

Most loans work on the basis that you will repay the loan with a fixed interest rate over a fixed period of time. However, there could be penalties for missed payments or for repaying early. You can use a business loan calculator to work out the final cost of a loan before you agree to the terms.

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How can a business loan help your business?

It’s often said that you need to spend money to make money. Of course, that is not always the case - many entrepreneurs start a business with little or no money. However, many others have to borrow to get the funds they need to create a viable business or to invest in a business that has potential for growth.

Common reasons to take out a business loan include:

  • to get a new business off the ground;
  • to expand a business;
  • to buy more stock;
  • to take on new employees;
  • to move premises or invest in new equipment;
  • to invest in new technology or a marketing campaign;
  • to help with cashflow.

How do business loans work?

Most business loans work on the basis that you borrow an agreed amount of cash and pay it back over an agreed term with interest. This arrangement is what’s known as a “term loan”.

Another option for businesses is to agree a “line of credit” with your bank which allows you to borrow cash when needed (up to an agreed amount) so you only pay interest on the money you take out. However, if you go over your limit or repay late, extra fees could apply.

When you’re shopping around for a business loan, you’ll need to compare the interest rates and repayment terms offered by different lenders. Interest rates can be fixed or variable. There are pros and cons with each. A fixed interest rate can give you certainty but there may be fees for early repayment. Loans based on variable rates can be more flexible but there’s a danger that rising interest rates will make it harder to repay the loan.

Another important factor is security. Business loans are usually either “secured” or “unsecured”. A secured loan often uses assets as security. If you can’t make the loan repayments, the lender can sell the asset to get their money back. Business assets could include property, stock and machinery. Secured loans typically have lower interest rates than unsecured loans.

Unsecured loans are much harder to get and they are usually more expensive. Banks can also ask for a director’s personal guarantee - if your business is unable to repay the loan, you will be personally responsible for it.

If your business is struggling to get a loan, the government’s Enterprise Finance Guarantee scheme (EFG) could be the answer. EFG facilitates lending to viable businesses that have been turned down for a normal commercial loan due to a lack of security or a proven track record. However, participating lenders will still want to be satisfied that your business can afford the loan repayments.

What happens if you can’t pay back a business loan?

If you are struggling to repay a business loan and you miss some payments you will almost certainly have to pay late payment fees; you could also be liable for extra interest or administration fees. In the longer term, missing payments could damage your credit rating and make it harder to borrow in the future. If you fail to make a number of payments over several months, you will be seen to have defaulted on your loan. If your loan was agreed with a director’s guarantee, you will be personally responsible for paying back the loan. If you took out a secured loan, then your assets could be seized.

Where can I get a business loan?

There are more options than ever when it comes to business borrowing. It’s always worth approaching your business bank first as you already have a relationship with them.

As well as the high street banks, there are plenty of other small business lenders. You can use Nerdwallet's business loan comparison tool to find out what many of the leading providers offfer. 

Another option is peer-to-peer lending platforms (P2P) that match businesses that need funding with private investors looking to invest. Applications are made online and the process can be quicker than a traditional bank; lending could come from one person on the platform or from a pool of people. In other respects, P2P lending is no different from a bank loan - the lender earns interest on the loan and the small business pays it back within the agreed timeframe.

How can I maximise the chances of being accepted for a business loan?

A detailed business plan is absolutely key - backed up by evidence including company accounts, cash flow projections and realistic sales forecasts. If you use accounting software it’s easy to share financial reports with potential lenders. You may also need to show bank statements and tax returns.

You’ll have to explain why you want the loan and show how you intend to pay it back. Lenders will also ask about you and your management team, as well as investors. They will want to know how much equity you have in the business. Above all, remember that lenders are looking for a solid business that will deliver steady income.

Do I need a good credit rating to get a business loan?

Yes, lenders will look at your personal credit score to see if you have a good track record on managing finances. In fact, every member of your leadership team will need to have a rock-solid credit history. Your track record in business will also be a key deciding factor. If you run a limited company, your personal credit record will include the company accounts filed at Companies House.

How can I get a business loan as a start-up?

It can be difficult to get a loan for a new business because most lenders want to see at least two years’ of business accounts. One option is to take out a personal loan to start a business. A personal loan will be in your name; if you have difficulties paying it back it will affect your personal credit rating.

You can also apply for a government-backed Start-Up loan. The government start-up loan scheme offers loans of £500 to £25,000 to start or grow a business. It is not a business loan, but an unsecured personal loan. However, it comes with free guidance to help you write a business plan, and successful applicants get 12 months of free mentoring. Applicants must be over 18 and have (or plan to start) a UK-based business that’s been fully trading for less than 24 months. Start Up Loans charge a fixed interest rate of 6% per year. You can repay the loan over a period of one to five years; there’s no application fee and no early repayment fee.

How to start a business with no money

What do Apple, Subway, Virgin and Dell have in common? These businesses were all started with next to no money. If you've got an idea for a business but no spare cash, here's how you can get it off the ground

Starting a business with little or no money may not be easy but if you can find a way to create a revenue stream without start-up funding then you'll know you've found a business model that works. Here are five ways to get started.

1. Start slow with a side hustle

Starting small and scaling up is a tried and tested way to start a successful business. A side hustle allows you to keep your day job so you're not reliant on your new venture for an income. It means working evenings and weekends but it takes the pressure off while you find out if there's a market for your business idea. It also allows you to find out if you enjoy running a business. You could even try out a couple of different business ideas before you take the plunge and leave your day job.

 

2. Take advantage of freebies

You can find office furniture, computer supplies and other business equipment on sites like FreeCycle or look in the Freebies section of Gumtree. When it comes to building a website, sites such as Wix, Squarespace, Weebly, WordPress and GoDaddy offer free templates and you don't need to be an expert to create a professional website.

Market research is another important step on the road to starting a business. Desk research can cost nothing - analyse your competitors' websites, check them out on social media and see if there is a gap in the market for your idea. You can ask friends and family to try out your product and give you feedback.

Your friends and family can also be a good source of skilled labour; ask around to see if anyone can help with photography for your website or creating a logo. If you do need you pay for professional help, freelancer sites such as PeoplePerHour, Fiverr and Upwork allow you to keep costs to a minimum.

3. Choose the right business model

There are lots of businesses, especially services, that are easy to set up and have low start-up costs. These include: gardening, cleaning, tutoring, dog walking, writing and graphic design. Just about any professional consultancy - such as marketing or IT - can be established for very little outlay. And if you already have a hobby that you are passionate about such as photography, or a trade that you work in such as plumbing, then you're halfway there. You've already got the expertise and the equipment that you need to start working for yourself. What's more, the majority of these business ideas can be run from home, so you can keep your overheads to a minimum.

4. Sell online

If you want to start a business selling products, and you don't have the money for premises or to build your own ecommerce website, then your best bet is to start selling on platforms like Amazon, eBay and Etsy. These massive online marketplaces do a lot of the work for you by getting your products in front of their considerable audiences.

You don't even have to make your own products - dropshipping allows you to sell goods which come directly from the manufacturer or the wholesaler. With dropshipping, you can launch an ecommerce business without having to pay for lots of inventory; you only pay the manufacturer when the item is sold. It means you can also test out different products with no risk. Another option is to use Fulfilment By Amazon where Amazon takes care of storing and sending out your stock as orders come in.

5. Market your business for free

There are lots of ways to market your business for free using online tools and social media as well as good old-fashioned networking. It's worth using every tool at your disposal when you are starting out to get your business in front of your target audience.

Social media is a great place to start. If you're starting a professional consultancy business, you'll want to sign up for LinkedIn and use it to reach out to prospective clients. Instagram, Twitter and Facebook are all fantastic tools to help you spread the word about your business - whether you are selling to consumers or businesses. The key is to make connections with influencers as well as potential customers.

There are lots of other ways to improve your visibility online for free. Start by making sure you're listed in all the free online directories as well as Google listings. Search engine optimisation (SEO) is also vital if you want to get your website close to the top of the rankings. Make sure your web copy includes the keywords and phrases that people use when they are searching for a business like yours. It's also worth reaching out to journalists on your local newspaper, radio or TV station to tell them about your business - if you can suggest a good angle, an interesting story or a photo opportunity, you have a good chance of getting some free publicity.

How to register a business

If you want to start a business - whether you’re operating as a sole trader or setting up a limited company - you'll need to register your business. We explain the steps you need to take to comply with government regulations

How to register a limited company

The first thing to do is choose your company name. Before you register your business, you’ll first need to check your company name is available with Companies House. It’s easy to do this by using the Companies House name availability checker. You must also ensure that your business name complies with government rules. Your company name cannot be too similar to another company name or a trade mark and it must not be offensive or contain sensitive words or phrases.

The next step is to register your company with Companies House - this applies to limited companies as well as limited liability partnerships (LLPs). You can do this yourself on the government website. You also have the options of registering by post, using an agent or using third-party software.

In order to register, you’ll need three pieces of personal information about yourself and your shareholders, such as National Insurance number, passport number, mother’s maiden name or town of birth. You will have to appoint at least one director; their name and address will be published on the Companies House website.

In order to set up your company, you will need to create three key documents:

  • Prescribed particulars explaining your business structure and what each shareholder is entitled to;
  • A memorandum of association, a legal declaration in which all shareholders agree to start the limited company;
  • Articles of association, the rules about how the company will run, as agreed by all the shareholders and directors.

Once you’ve registered your company, you’ll be given a Certificate of Incorporation which has your company number on it and the date of its formation.

You can also use the company registration process to register for Corporation Tax and PAYE at the same time. You’ll need to register for PAYE if you’re employing staff, including yourself. If you’ve registered with Companies House by post, via an agent or using third-party software, then you’ll need to register for Corporation Tax separately. You must register for Corporation Tax within three months of registering your company.

As a taxpayer, you’ll already have a Government Gateway ID but you will need to create a specific Government Gateway user ID and password for your company when you register it.

 

How much does it cost to register a company with Companies House?

The cost of registering your company depends on the way in which you register your business. If you register online it costs £12 and you’ll be registered within 24 hours. Postal applications using form IN01 take up to ten days and cost £40. There are also different fees for registering using software or for same-day registration.

How to register your business as a sole trader

To get started as a sole trader, you need to tell HMRC that you are self-employed so that you can pay tax through self assessment. All you need is your National Insurance number. As a sole trader, you’ll need to keep records of your expenses and income and complete a tax return every year. You will have to pay income tax on your profits as well as Class 2 and Class 4 National Insurance.

You do not need a business name to trade as a sole trader although you can trade under a business name if you want to - but you cannot use the term limited in your business name unless you are registered as a limited company with Companies House. You’ll also need to make sure no-one else is trading under the business name you choose.

Sole traders are encouraged by HMRC to register as soon as possible after they start trading, but you can actually register at any time before October 5 in the second tax year after you started trading.

How to register as a partnership

A partnership business structure is similar to a sole trader set-up but with the profits shared as well as the responsibility for losses. If you’re registering a partnership you’ll need to register a nominated partner who will be responsible for completing the company tax returns. Individual partners must pay tax on their personal share of the profits. Business partnerships must be registered by 5 October in the second tax year after the partnership started trading.

How to register for VAT

Registering for VAT is mandatory if your turnover is over £90,000 a year from 1 April 2024 (previously £85,000). However, you can voluntarily register for VAT if your turnover is below this, allowing you to reclaim VAT on your purchases. When you register for VAT, you’ll be sent a VAT registration certificate which includes your VAT number and details of when to file your first VAT return and make your first payment.

How to register for the Construction Industry Scheme

You must register for the Construction Industry Scheme (CIS) if you’re working in the construction industry as a subcontractor or a contractor and you’re operating as a sole trader, the owner of a limited company or a partner in a partnership or trust. You’ll need your legal business name or the name you’re trading under, your National Insurance number, your Unique Taxpayer Reference Number (UTR) and your VAT registration number (if applicable). If you are both a subcontractor and a contractor, you’ll need to register for CIS as both.

How to register your business name as a trade mark

Registering your business name as a trade mark is not a legal requirement, but it can be a good idea if you want to stop other people from trading under the same name. When you register your trade mark, you’ll be able to put the ® symbol next to your brand - to show that it’s yours and warn others against using it. It also means you can take legal action against anyone who uses your brand without your permission.

As a start up, your most valuable asset is your employees, so how can you show them they matter? Employee ownership could be the answer…

Finding good employees is difficult as a new business when you're competing with well-established companies that offer more secured positions. One way to attract decent talent is to introduce schemes like employee ownership that give something back to your staff.

Attracting and retaining employees is just one of the many benefits of these schemes for start ups. This can be seen replicated across a dozen employee ownership case studies in the UK.

But, as with everything in business, there are upsides and downsides. In this post, we're going to share all the pros and cons of employee ownership so you can decide if it's the right fit for your new business. Let's take a look…

What is employee ownership?

Employee ownership is exactly how it sounds; a company that is set up so that all employees are able to acquire shares in it. Employee ownership schemes provide two ways for your staff to own shares in the company:

  • Direct employee ownership: the employee owns shares in the company directly which they can buy at a tax-efficient rate.
  • Indirect employee ownership: the business is owned by a trust who look after the shares on behalf of the employees.

Over two million employees in the UK own shares in their company through an employee ownership scheme. They receive financial incentives, from income tax-free bonuses to national insurance breaks.

These tax advantages are provided by the UK government in an attempt to encourage more companies to become employee owned. The following schemes all come under this umbrella:

Each of these schemes has its own employee and tax benefits, and there are rules you need to follow to be eligible for one. So, it's worth looking into them a little further if you decide to make your start up company employee owned.

What are the pros and cons of making your start up employee owned?

Now that we have some idea of what employee ownership schemes are, it's time to look at the pros and cons of making your start-up employee owned.

Pros of employee ownership for start up tax breaks

As we mentioned in the last section, there are a lot of tax benefits when you adopt a government-approved employee ownership scheme.

If you wanted to set up an employee ownership trust, for example, sales of shares in your company would be relieved from capital gains tax, but only if you sold the majority of shares in the company.

Once your company is owned by one of these trusts, you can pay your employees up to £3,600 in bonuses, free from income tax. This might not seem like a big deal at first but, as a start-up company, being able to reward your staff with bonuses and not lose any of it to income tax will save you a lot of money.

Attract and retain talent

In the introduction to this post, we talked about how difficult it was to attract good employees as a new business. Employee ownership is still a relatively new business model, and with only 730 companies in the UK currently using one, you would definitely stand out.

Also, employees who work hard often want to see a reward for it. So, having a company where your staff earn more money the harder they work, will attract the right kind of people.

Once you have those people through the door, you've trained them, and they become an integral part of the business, they'll be much less likely to leave because their money is tied up in shares in your company.

Share responsibility

Starting a business by yourself can be challenging. By sharing your company with your employees, they'll have more of a say in how it's being run. So, they're less likely to just 'do their work' and go home.

The better the company runs, the more money they make - which will make them care about the success of the company as much as you do. Instead of starting a company on your own you'll be starting a company together.

Make your business perform better

With your employees being more involved in the running of the business and staying with you longer to see the benefit of their shares, you have a valuable reservoir of information to tap into from the minute you start your business.

Hosting regular open forums for staff to discuss issues their department has that need to be resolved and sharing ideas about new ways to promote your products, improve sales, and everything else, will help keep your business agile and stagnation-proof.

Cons of employee ownership for start ups

Lose control

Unsurprisingly, when you give up the majority of shares in your company, and everyone effectively becomes an owner, you lose a certain level of control over the business.

If you fail to keep 75% of the voting shares in your company, it will officially become everyone's company. This can be difficult for a new business owner to accept.

Expensive

Employee ownership schemes are less expensive to set up than they used to be, especially with the tax breaks introduced by the UK government in 2014. That said, they are still an extra expense you wouldn't have to consider if you didn't adopt one.

The short-term costs of drawing up the scheme and getting it approved can eat into your start-up funds for the business at a time where every penny is crucial to staying afloat. You need to really consider whether you can afford it before you decide on an EOS.

Unpredictable

You can only promise your employees that they will see a return on their shares for so long before they consider leaving the company. If you don't start to show profit in the first year, which is very common for start up companies, you could lose key members of staff.

This is made harder by the fact that share prices are volatile and can fall quite easily. The only plus side to this is that most employee ownership schemes have a 'no-lose' failsafe where, if prices drop, employee shares won't drop but they won't increase either.

Think your start up would benefit from employee ownership?

In this post, we've shared the pros and cons of setting up employee ownership for your start-up business.

Hopefully you have a better idea of what employee ownership is and whether it's right for you. If you're interested, it's a good idea to look into the individual types of schemes a little more so you know exactly what the rules are and can gain a little more insight into what it entails.

Copyright 2021. Featured post made possible by Arthur Sullivan, freelance writer.

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