Seven top financial tips for home-workers

If you think working for yourself from home could be your next career move, take a look at these top money tips.

There's no question the employment landscape is changing. With the threat of redundancy rising in the recession, more and more of us are choosing to become self-employed and work from home.

Home-working certainly has countless advantages - although I'll refrain from all the usual jokes about sitting around in your PJs all day long, and generally living the life of Riley....  oops, too late!

Unfortunately, despite these potential benefits, there are many potential pitfalls too.

So, before you decide to take the plunge and become your own boss, here are some of the main factors you need to consider first:

Financial Rules

1. Get registered

If you decide to work for yourself you must register with HM Revenue & Customs (HMRC) as self-employed.

Luckily, this can be done quite easily by phoning the Newly Self-Employed Helpline on 0845 915 4515. Alternatively, you can fill in form CWF1. Get this form online.

2. Pay your own tax and national insurance

As a self-employed worker, you'll be responsible for paying your own tax and National Insurance. You'll pay income tax on your earnings by completing a self assessment tax return once a year.

You'll usually pay Class 2 National Insurance Contributions (NICs) to HMRC directly and Class 4 NICs through your tax return. But what's the difference between the two?

You'll pay Class 2 NICs at a flat weekly rate, which is currently set at £2.40. You'll also pay Class 4 NICs as a percentage of your taxable profits. At today's rates, you'll pay a rate of 8% on annual taxable profits between £5,715 and £43,875. You'll also pay at a rate of 1% on any taxable profits over that amount.

If your earnings during the 2009-10 tax year are expected to be less than £5,075, you may qualify for the Small Earnings Exception (SEE). This means you won't have to pay any Class 2 NICs.  

3. Manage your tax bill

You won't be paying tax on an ongoing basis as did when you were employed, so you'll need to put some money aside to cover your tax bill. Self-employed lovemoney.com writer, Serena Cowdy, suggests putting aside at least 25% of your income, or more if you're a higher rate tax payer.

It's also a really good idea to save this money in a decent easy access savings account, such as the market-leading Alliance & Leicester Online Saver Issue 5 or the Birmingham Midshires Telephone Extra Account. Both accounts pay 3.15%, and will allow you to earn some interest before shelling out on to the taxman.

You may also want to consider an offset mortgage. That way, the money you owe the taxman will reduce your mortgage. Winner! Read more about offest mortgages.

4. Claim for tax deductible expenses

Not all expenses related to your business will be tax deductible, but many are. It's really important you claim for as much as you can to keep your tax bill down to a minimum. You can usually deduct your business expenses first before you work out your overall profits.

There are three different types of expenditure, according to HM Revenue & Customs: capital, business and private.

Capital

A capital asset is an asset which you have bought to create or improve your business.

For instance, if you buy a van to help run your business, it would be considered a capital asset. But if you hire the van instead, it wouldn't. Other examples of capital expenditure include the cost of buying business premises, machinery, computers, fixtures and furniture.

Tax relief does not apply to all types of capital expenditure and there are special rules for how you can claim it, if it does apply. The key point to bear in mind is that you can't claim tax relief for buying the asset, but you can claim a capital allowance - usually a set percentage of the cost of the asset per year. You can then use this capital allowance to reduce your taxable profits that year.

Business expenditure

This is expenditure which is 'wholly and exclusively' made to benefit your business. So your sole purpose for the expenditure is a business purpose.

For home-workers this means that running costs, such as some of your heating, lighting, phone and broadband bills, are deductible expenses, as long as you can show that the bills were incurred while you were running the business.

You can deduct the full amount of your allowable business expenditure from your business income to work out your taxable profits.

Private expenditure

This is non-allowable expenditure that's been incurred for a private purpose. For example, it includes your day-to-day living expenses and your normal household expenses.

You can get some private (i.e. non-business) benefit from your expenditure and still get tax relief, as long as the private benefit was incidental and not the reason for the expenditure, but you must be able to clearly identify and separate the expenditure between business and private purposes. The private part of any expenditure that's both for business and private purposes is not eligible for tax relief.

For this reason, it's a good idea to set up a separate, office phone line and broadband connection (if you need internet access to run your business). That way, you'll get separate bills which you can simply deduct from your business income in full.

Don't forget, it's essential you keep records of what you have earned and what you have spent. HMRC might ask to see these records.

There's more help on these issues on the HMRC website.

5. Be a great record keeper/accountant

It's a good idea to get a suitable system in place from day one. Make sure you update your records regularly so you can keep track of your earnings and expenditure. This will help you to avoid paying too much tax, and to complete your tax return more easily. If you claim business expenses, you'll need to keep the necessary records to support them.

Records must be kept for at least five years from the date you filed your most recent tax return.

6. Learn to cope with irregular earnings

All the normal budgeting rules fall a bit by the wayside if your earnings come in peaks and troughs. It can be difficult to cope, particularly when you're first starting out.

You'll need a cash cushion behind you to help with cash flow. If work dries up for a time, or your clients pay invoices late, you'll need some emergency savings to see you through. Make sure you set a time limit when you expect invoices to be paid, and be prepared to chase them up if they aren't forthcoming. Find out how to build up an emergency savings pot.

7. Replace lost employment benefits

And don't forget about all the benefits you'll be giving up when you become your own boss. Sadly, you'll have to wave goodbye to your work-based pension, life insurance, private healthcare insurance and so on. You should consider replacing these with your own private policies.

But perhaps, even more importantly, you won't qualify for sick pay. It's an extremely good idea to insure against the risk of long-term incapacity with critical illness cover or income protection insurance. These policies are designed to replace some of your earnings if you're unable to work because of an illness or accident.

That just about covers the key financial aspects of working for yourself - I hope it hasn't put you off too much. Only you can decide whether it's the right move for you. Good luck!

You can compare life and critical illness quotes at lovemoney.com

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