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Professional freelance income

If you receive professional fees income tax is charged on the profit. The tax legislation was revised recently and the source is now known as trading income where previously the description was income from a profession or vocation. For tax purposes profits mean fees less business related expenses and allowances.

Notifying Her Majesty’s Revenue & Customs

If you are self employed you need to register with HMRC for both tax and National Insurance Contribution purposes. You need to complete a form CWF1-this can be obtained on the HMRC website. If you do not register within 3 months of setting up in business you may be liable to a penalty of £100.

Allowable expenditure

You cannot claim a deduction for any expenditure that is regarded as personal expenditure. The usual types of expenses that can be claimed are:

Travel & Subsistence – if you use your car the claim is normally based on a mileage allowance which at the moment is 40p per mile up to 10,000 miles then 25p per mile thereafter.

Premises – Usually this is a proportion of your annual household expenses based on the area in your house set aside for business. If an office or consulting room is rented then the costs involved are allowable.

Spouse Wages – If you employ your spouse to carry out administrative duties then the salary paid is an allowable expense. You need to make sure the salary is actually paid and is commensurate with the duties involved. You should also bear in mind whether tax and NIC have to be deducted. This will depend on your spouse’s other sources of income and the level of salary paid.

Miscellaneous Expenses – The usual types are postage & stationery, telephone & internet costs, professional subscriptions & insurances & accountancy fees.

Capital Allowances – If you have incurred capital expenditure on items used in your business such as a computer & peripherals or business furniture. The allowance is based on a % of the cost, reducing each year in line with the residual value of the item for tax purposes.

National Insurance Contributions

If you are self employed you must pay Class 2 NIC to HMRC. The payment is a flat rate which is at present at £2.10 per week. If your earnings(i.e. profit) from self employment do not exceed £4465 for the current tax year then you can apply for exception.

If you earn above £5035 you will also have to pay Class 4 NIC. You will have to fill out a self assessment tax return to pay the charge. The rate for 2006-07 is 8% between £5035 and £33540 plus 1% of the excess over £33540.

If you are employed as well as self employed you may have to pay Class1, 2 & 4 NIC.

There is a maximum charge and the calculation is complex. If you consider you are within this category you should seek professional advice.

Record Keeping/Bank Account

This is important and you should keep details of all fees and expenses including invoices and receipts. You have to keep these for 5years and 10 months after the end of the relevant tax year as HMRC may ask to review these. The papers have to be kept for this length of time irrespective of whether you have made a profit.

It is a good idea to have a separate bank account for business transactions as this will clearly show all business income and expenses. Any cash receipts should also be banked in this account.

Tax Payable

This will be due on 31st January following the end of the relevant tax year- so any tax due for 2005-06 will fall due for payment on or before the 31st January 2007. Payments on account may also be due. There are certain situations where they can be reduced or postponed.

It is worth seeking professional advice to check whether these apply to you.

This information is for general guidance only. You should always seek professional advice based on your own personal circumstances.