How are National Insurance Contributions calculated for a sole trader?

How are National Insurance Contributions calculated for a sole trader?

As a sole trader, there are 2 types of national Insurance payable in your self-assessment tax return. There is Class 2 National Insurance and Class 4 National Insurance.

Class 2 National Insurance

Class 2 National Insurance is payable at a flat rate for each week you have been self-employed. If you are self-employed and earning below the small profits threshold per year, there is no requirement to pay class National Insurance. You may however choose to pay class 2 National Insurance Voluntarily to protect your eligibility to certain state benefits. The table below shows the weekly national insurance contributions rates and the small profits threshold.

Financial Year ending 5 April Weekly NICs small profits threshold
2018 £2.85 £6,025
2019 £2.95 £6,025

 

Class 4 National Insurance.

Class 4 National Insurance is payable based on your taxable self-employed profits. The table below shows rates for different bands.

Financial Year ending 5 April Profit Band Class 4 NIC
2018 Up to £8,164 nil
£8,164 up to £45,000 9%
Over £45,000 2%
2019 Up to £8,424 nil
£8,424 up to £46,350 9%
Over £46,350 2%

 

For more information about how your National Insurance has been calculated as a sole trader, please contact us.

Managing your business expenses automatically

You can automate the process of entering your bills, receipts and expenses by using AutoEntry. AutoEntry helps to save time by eliminating the manual entering of expenses. AutoEntry provides an App which you can use to scan your bills and receipts. The software automatically extracts the key information like date, supplier, amount and VAT. There is a facility to select the category of expenditure according to the accounting system you have put in place for your business.

AutoEntry automatically integrates with QuickBooks Online and Xero – our preferred bookkeeping solutions. Information is published from AutoEntry to QuickBooks Online or Xero so that the scanned receipts are available as attachments to the transactions in your bookkeeping software.

From AutoEntry you can choose to ‘mark the bills as paid’ to match the information on your bank statement. What’s more, using AutoEntry means you can run a paperless business as your expenses are saved in the cloud and you do not need to keep the paper copies. Where bills are received by email, you will have a dedicated email address where you can forward your emails and the software will extract the bills from the email. You can also upload scanned bills directly from your computer.

Because it is a cloud-based solution, you can give access to your employees or business partners regardless of where they are in the world so that they can also send their bills and expenses, therefore sharing the load of bookkeeping. You can also share access with your accountant or bookkeeper, and they can review the transactions for you before posting to Xero or QuickBooks Online.

Many businesses have recorded a saving of over 50% in time from using AutoEntry in their business. Think of what you could do with the extra time saved. Improving efficiency in your business could mean you have more time to focus on other parts of your business.

Contact us if you’d like a Free trial or if you’d like to explore other ways you could save time in your bookkeeping and accounting process to improve efficiency in your business. There is more information about AutoEntry on their website.

How to budget for your business without complicating things

What is a budget? Put simply, a budget is a tool for planning income and expenditure. Every business needs a budget to plan for resource allocation. A business should set a budget at least once a year but review this at least quarterly.

The No Budget story

Many years ago, when I worked in a large corporate organisation, I recall needing to fill out a ‘spending request form’ which would go to my line manager for approval. In those days, my pet expense item was attending conferences and training sessions as I was always thirsty for new knowledge and {secretly} it was an opportunity to take time off work and explore other possibilities.

The approval process was something like this: I would find an event advertised in the local media and assess how it would be beneficial to my role. (most of them usually were). I would approach my line manager and pitch the idea of attending the course or conference. If she was convinced of the benefits, I would be asked to fill a form to formally request for funding. She would countersign the form and send to a more senior manager for approval. The senior manager would then contact the management accountant who would check if there was a budget allocation available. The training and development budget was a pooled budget so when it was finished, that was it. If there was a budget, the management accountant would endorse the piece of paper and that would mean that the event had been approved in principle.

However, there are many times when the document came back with a ‘NO BUDGET’ Stamp on it! That was always disappointing for me, not least because of the missed opportunities for gaining new knowledge. For the business however, the ‘NO BUDGET’ Stamp was an important control mechanism to ensure that there was no overrun of costs.

Why do you need a budget?

A budget is an important tool for managing the costs of a business. A budget is a plan that outlines the expected income and expected expenditure for a business. Having a budget helps ensure that you will always have enough money for the things you need and the things that are important for taking your business forward. Following a budget will ensure you keep focused on the ‘Key things’ and avoid impulse buying or chasing the next new shiny object available. It also ensures that you don’t spend money on the wrong things and end up having cashflow problems. It will ensure you don’t spend money that you don’t have and end up getting into debt or falling foul like missing supplier payments or not paying your tax on time. Having a budget will also help you get out of debt by carefully managing payment. It can help you control your spending and set money aside to pay employees, back what you owe. Having a budget also helps you prepare for emergencies or save for retirement by consistently putting money aside over a period of time.

A budget is an important control mechanism where every spending request can be assessed against. Using a budget will help highlight unnecessary spending habits.

It also helps to ensure that all necessary expenditure e.g. cost of sales and overheads have been planned for to reduce omissions.

What does a budget look like?

A budget has got two aspects – money in and money out. Money in is the income excepted and money out is the expenditure.

Money in – define the income streams – where will the money come from and when is it expected. List out all the sources of income and any special conditions connected to them. List any assumptions and any reliance on other parties.

Money out – This is the expenditure – what does the business need to put in place for the income to flow in the manner expected above? List any assumptions made. The key items to budget for as expenditure will depend on the type of business but will typically revolve around direct costs of sales, people resources, assets and equipment, premises and professional services.

Identify who will be responsible for the budget. Each budget must have an owner. For a small business this will usually the director or owner. To own a budget means having the authority to spend and being responsible for and being held accountable for managing the budget.

How To build a budget

Where do you start in building a budget? For a new business, tool with information contained in your business plan. For an existing business, start with your last set of management accounts as a starting point.

When you have your, income and expenditure, the easiest start for building a budget is to use a spreadsheet. The income and expenditure will be down to the left on the rows and the months will be across at the top as columns. Fill out the information for every row and column and make note of any assumptions at the end of each row or on a separate tab. A budget makes up the profit and loss statement and from the spreadsheet you can easily add formulae to calculate the expected profit or loss is for each month.

There is also specialised software for creating a budget for your business. QuickBooks Online and Xero have inbuilt sections for preparing a budget for your business. Both QuickBooks Online and Xero will have guidance on how this works.

Once you have you budget, review to make sure it is realistic and assess if it will help achieve your goals.

Conclusion

In summary, a business should set a budget at least once a year, or when starting a new venture of project. Plan for both income and expenditure. Expenditure should occur in line with an existing budget. Budgets should be reviewed on a quarterly basis and any variances with actual performance addressed.

Over to you

Have you got a budget for your business? Are your spending decisions aligned with the items in your budget? How about the income streams? Are you on track?  What are the biggest challenged you face with budgeting?

Let us know in the comments below.