Nigel Simmons
As part of a sponsored feature, is putting your questions on tax issues for freelancers to a leading accountancy firm.

Using the message board, Nigel Simmons FCCA, managing director of Acconomy Limited, will answer your questions, queries and calls for advice on all things tax-related.

We'll regularly highlight a question and answer from the forum and post it to the main news site. This week's featured question is from forum user crobar:

I have been thinking about making the move into freelance journalism for a while, but want to get my house in order before I do. I'm a little confused as to what steps I need to take to make sure I'm deemed "self-employed" - is this necessary for tax reasons? Are there specific steps I should take?

If you do decide that freelancing is the way forward then hopefully the following will give you a steer as to the main things to consider:

1. You have a choice about whether to trade as a sole trader i.e. become 'self-employed' or to trade through your own limited company. The pros and cons are as follows:

Sole trader: By far the simplest way of operating. All you need to do is inform HMRC that you are becoming self-employed (Tel: 0845 915 4515). Once you've done this you will start paying Class 2 National Insurance contributions at £2.40 per week. You will also be responsible for completing a self-assessment tax return. In order to complete your tax return you will have to produce a set of accounts that show your income and expenditure and hence the profit that you made during the tax year in question. You can do this yourself or you can employ an accountant to complete this work on your behalf.

Be careful to take into account the estimated tax for the following year. For instance, let's say you start freelancing on 6 April 2010 (the first day of the 2010-2011 tax year). Your first tax return will need to be completed for the tax year ending 5th April 2011. You won't have to actually pay any tax until 31 January 2012. That gives you a very long holiday from paying tax. However, when 31 January 2012 arrives you would have to pay tax on profit that you made in your first year ending 5th April 2011 AND an on account payment of 50 per cent of this amount towards the following year’s tax bill. So it pays to be aware and think ahead.

When it comes to paying tax you will pay income tax at the same rate as you would if you were employed. You will also pay Class 4 National Insurance contributions at 8 per cent on your profits over £5,715 (as an employee you would probably be paying NI contributions at 11 per cent, so you're slightly better off being self-employed).  

The good news about being self-employed is that you will be able to claim expenses against your income e.g. for use of your home as an office and some travel and subsistence. You can also offset the cost of any equipment that you purchase, such as computers.

Forming your own company: This is a more formalised way of trading than trading as a sole trader. There are potentially some considerable tax savings to be made by going down this road, particularly if you are a higher rate tax payer - and even more so if the impending 50 per cent rate of tax is likely to be an issue for you. However, as you are just starting out on the freelance road, I think the KISS motto [Keep it simple, stupid] has a lot of merit. Best to start as a sole trader - you can always start your own company at a later date if your circumstances justify it.

As ever we're happy to have a chat and offer some initial free advice - Nigel Simmons FCCA (0845 29302330)

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