Need help getting your business finances in shape? Join Crunch’s Ben Schaefer as he explains the simple steps you can take to remain in good financial health as a freelancer, contractor, or small business owner.
(Content is for general information only. Always take advice. Read our full disclaimer).
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Questions and answers from our webinar -How healthy are your finances?
Q: When is the best time to register my company? I am not trading yet but I plan to this year.
A: You can register or set up a limited company whenever you like – but it may be best to wait until nearer the date your company expects to start trading – you need to be registered in order to start trading. If you think you’re going to be VAT registered then you need to register for VAT as well. You must register for VAT if you expect your company’s turnover to be more than £85,000 in a rolling 12 month period.
Q: Can we claim expenses that are things that are business related but that we still enjoy? eg. theatre tickets or gig tickets if we are arts-based (for research purposes)
A: HMRC are very strict that allowable expenses need to be wholly and exclusively business related. It’s difficult to see how purchasing a ticket for a commercial entertainment event would be ‘wholly’ for business purposes, even if an element of research is involved. It may be possible if your business was required to attend, but in that case, they may ask why would you need to purchase tickets?
Q: Is there no minimum amount a limited business has to make before it has to pay tax?
A: Once you set up your limited company you’ll be liable for Corporation Tax on the profits of the company. In the 2019/20 tax year, the rate is 19%. If you don’t have profits, then you won’t pay tax. You calculate your profit before tax by adding up all your company’s income and taking off any allowable business expenses. Your business expenses include items such as salaries and wages. Dividends are paid from the company’s profit after corporation tax is paid.
Q: Is IR35 an issue for an employer, or for us as sole traders / limited companies – and what do you classify as being a long-term contract? Nine months? Permanent?
A: IR35 rules are complex and affect mainly contractors working through their own limited company (a Personal Service Company). The length of contract can be an indicator of your employment status, but it’s not the only one. You need to consider a number of factors including the day to day working practices you follow.
Sole traders aren’t at risk from IR35, though the company hiring the sole trader could potentially face penalties if the contract is deemed to be inside IR35. The responsibility for who decides if a contract is inside IR35 depends if you’re working in the public or private sector. Our IR35 page explains more about IR35, if you have any more questions about it please speak to us.
Q: What is a simple way to manage your business finances?
A: It starts with being organised, we’ve got an article explaining what bookkeeping is and why it matters. We also strongly recommend that you use a separate business bank account for your business.
Q: What is an affordable finance software for us?
A: Well, we’d say Crunch is great value – you get online accounting software to keep on top of your finances, unlimited support from client managers and expert advice from accountants from just £29.50 +VAT a month.
Q: Can Crunch help me to determine whether I should operate as a limited company or a sole trader?
A: Absolutely! Our Advisors are here to assist with making these sorts of decisions and will listen to your circumstances so that we’re able to provide you with tailored advice that is suitable for you and your situation. We’ve also got a great article to help you decide whether operating as a sole trader or limited company is best for you.
Q: Is it OK to claim for a monthly travel card if I buy it for convenience to travel around London but am not using it on a daily basis?
A: If the travel is wholly and exclusively for the business, then it can be purchased by the company and is a business expense. However, if the travel is to a permanent place of work, you cannot claim this from the company. If it is a temporary place of work, there are still limitations to claiming travel.
If you have a monthly travelcard for business use then you are also able to make personal journeys using it. Read our limited company business expenses article for more details.
Q: What is the annual cost amount I can claim for working at home through a limited company?
A: If you’re working from home you can claim £208 annually (£4 per week) to cover associated costs without receipts. If you want to claim more than this you would need to set up a rental agreement between your company and the property owner (even if it’s you who owns the property). This could have Capital Gains Tax implications when you come to sell your property.
Your accountant will be able to run some more complex calculations in order to establish allowable amounts. Our article on working from home explains the rules and your options.
Q: How do I set up a limited company
A: It’s really simple and you can either do it yourself in minutes on our Crunch Formations site, or we can do it for you if you become a Crunch client. If you go down the DIY route we’ll even refund the fee if you decide to become a Crunch client. Our article on setting up a limited company has all the information you need, or you can talk to one of our advisers.
Q: How to estimate income/turnover
A: At its simplest, what is your day rate and how many days a week (and weeks per year) will you be working, and what expenses will you have. Our simple take-home pay calculator can help here (it will also show whether you’d be better off as a sole trader or a limited company). If you want to get more detailed, then you may want to take a look at our cash flow forecasting spreadsheet.
Q: How to negotiate a wage/what rates do I charge
A: It all depends on what industry you’re in, what the competition is in your area, your skills and experience, the nature of the project and what your client is willing to pay. We usually suggest you start by thinking about how much you want to earn and then seeing what that would mean for your day rate. We’ve got an article with more detail and tips on how much to charge clients.
Q: I currently use PayPal for receiving payments. Is there anything better as my business grows?
Firstly, you need to make sure you’re using separate bank accounts for your business and personal finances. You should use a business bank account. Paypal is used by many businesses and is well known. But there are loads of other ways you can take card payments we’ve written an article with a few options for taking card payments.
Q: What should I be saving per month for tax?
It all depends on how much you’re earning and what tax band you’ll be in. It also depends on whether you’re a limited company or a sole trader. It’s really important to make sure that you have enough put aside to pay any tax liabilities. Our Crunch personal tax estimator could be useful to help you see what your personal liability is going to be. As highlighted in an earlier question, you pay Corporation Tax of 19% of your company’s annual profit (in the 2019/20 tax year), so you need to make sure you’re saving at least that much. Using online accounting software like Crunch means you’ll always be able to see how much tax your company owes. If you’re a sole trader our article on how to pay yourself and how much tax to put aside should be helpful.
Q: What is tax deductible?
Tax-deductible usually refers to allowable business expenses. We’ve got two great articles on business expenses – one for limited companies and one for sole traders.
Q: When should I be filing – financial years?
There are lots of filing dates to keep on top of when you’re a limited company director – they’re all outlined in our limited company director’s responsibilities article. You need to file your company’s accounts at companies house within 9 months of its accounting period ending. You file your company’s corporation tax return with HMRC within 12 months of your accounting period ending.
When you’re a sole trader it’s simpler – the main deadline is the annual Self Assessment deadline of 31st January each year. You don’t have to leave it to the last minute though there are lots of good reasons to file your Self Assessment early.