Pensioners given tax warning as thousands go self-employed – what you need to be aware of

Pensions are at 'highest level in three decades' says Sunak

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There are now just under 4.3 million self-employed people in the UK, up eight percent from four million 10 years ago, according to the Office for National Statistics (ONS). For many, self-employment or starting up a business in retirement can be a fantastic way to use knowledge and skills to earn money, or to turn a hobby or passion into a career with the added benefits of more flexibility.

That said, there are some important things to consider – including when it comes to tax.

Stephen Martin, Tax Director at Old Mill, recently told about some of the different tax issues which self-employed retirees may want to note.

He warned that just like everyone else, retired people are of course still subject to tax.

Mr Martin added: “If you are in receipt of a pension, then your income is probably subject to tax at source, a bit like PAYE earnings, so you may not be completing a tax return.

“Any self-employed income will have to be taxed through the Self-Assessment Tax Return system and you may need to register for this if you are not already.”

This can be done through the Government Gateway.

Business income is taxable on profit rather than sales, Mr Martin explained, meaning self-employed people can deduct certain expenses “for tax purposes”.

Crucially, he warned Britons how “very important” it is to keep proper records of business income and expenses, as well as copies of invoices and receipts.

He suggested: “You should have a separate business bank account and I would recommend using one of the Cloud-based accounting apps for this.

“These make your record keeping really simple and you can photograph your receipts and store them electronically which is much tidier than bundling them all up in a drawer.”

If a business has sales, rather than profit, of more than £85,000 in a year, then they’ll need to register for VAT, and this could mean things become a bit more complicated.

“If your business is registered for VAT then you will definitely need software as Making Tax Digital means you have to submit your returns quarterly online,” Mr Martin said.

He also said it is important to consider the structure of the business.

“You could trade in your own name, as a sole trader, or you may want to consider forming a limited company.”

A sole trader is essentially a self-employed person who’s the sole owner of their business; it is the easiest business type to setup as there is very little paperwork – other than an annual self-assessment tax return – and it has greater privacy, Old Mill explained.

However, there’s no legal difference between a sole trader and their business – so if the business gets into debt, the sole trader is personally liable.

Unlike sole traders, a limited company is legally separate from its business owner, which has limited liability.

There are also tax differences. Companies pay corporation tax on their profits, and there is then another ‘layer’ of taxation if owners want to extract company funds as a dividend. However, Old Mill said with “careful planning”, it is possible to achieve some tax efficiencies, especially if family members can be involved in the business.

It does come with the responsibility of filing an annual return, and information about the business will be available publicly – including details about the directors and earnings will be shown.

Mr Martin said there are advantages and drawbacks to each, adding: “It depends on your personal circumstances and your business, so you should take the advice of an accountant on what structure is right for you.”

Another major consideration for retired people looking to explore a new venture is pensions.

He said: “If you have started your own business or become self-employed and are eligible for your state pension, you may decide to draw it – and any other private pensions – alongside running your business, but you don’t have to.

“If you delay taking your state pension, you will receive more when you do take it. If you leave your private pension(s) invested, they will have more time to grow.

“Again, there are advantages and disadvantages with both – speak to an expert about the right option for you.”

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