While I love to celebrate the fun parts of being a Virtual Assistant like getting so many dream clients signing up for the services you love delivering that you can leave your 9-5 – woohoo! – I need to bring us down to earth for a moment. 

 

We need to talk about tax. I can hear you groaning! But seriously, you don’t want to get it wrong. HMRC has the power to charge you a penalty which is not fun. As a self-employed Virtual Assistant, you are responsible for paying yourself and paying your taxes.

 

This is a basic rundown of how to pay yourself as a VA so you know what you should be doing tax-wise.

Understanding Your Employment Status

As an employed worker, you didn’t really have to think a lot about tax apart from seeing the amount of tax and NI deducted from your salary on your paycheck and feeling nothing but anger. Working as a self-employed VA, things are a bit different. You have to declare your income and expenses to HMRC which will determine the level of tax you have to pay. So no spending all your profits! In the government’s eyes, it’s not all yours. 

 

The way your tax is calculated depends on your employment status. When you are self-employed you can register as a sole trader or the director of a limited company. As simply as possible, a sole trader is a single legal entity with their business. On the other hand,  registering your business as a limited company and appointing yourself as the director legally separates you from the company. 

 

So which one do you choose?

As a sole trader:

• You are responsible for personal and business debts, meaning you are potentially putting personal assets at risk due to your business activity
• It’s much easier to set up and manage your business because you don’t have to file as much paperwork
• Everything earned in the business is yours because you don’t have to process profits through a company

 

As a director of a limited company:

• You are only liable for the amount of money you have put into the business because your personal and business finances are separate
• You have more legal responsibilities including registering the business with Companies House and filing business accounts
• The credibility of registering as a limited company could be particularly attractive to some clients and investors 
• It is more tax efficient as limited companies have access to better tax allowances and tax-offsetting schemes but you do have to pay additional taxes like corporation tax

 

I had an expert write a blog giving some more information on the differences, which has helped a lot of VAs decide whether to be a sole trader or a limited company as a Virtual Assistant. 

 

If you’re unsure, it’s worth checking out this HMRC employment status calculator. A lot of self-employed people start off as sole traders and then as the business grows, increasing income and adding team members, they set up as a limited company. 

Basics of Income Tax for UK Virtual Assistants

As making sure you’re paying your taxes as a self-employed person is so different to as an employed person, here are a few basics you need to know. 

How do I pay my taxes?

If you are a director of a limited company, you will pay yourself through the company, much like when you were employed, so tax and NI will be deducted before your salary reaches your personal bank account. You can also pay yourself dividends from the profits of the company which you will need to declare and pay taxes on, alongside any additional income streams, through a Self Assessment. The company will have to pay corporation tax too.

 

If you are a sole trader, you don’t have that separation between you and the business. So to report your earnings and calculate the amount of tax you owe, you’ll need to fill out a Self Assessment. This is when you report everything going on in the business financially. From this, you are put in a tax band which will determine how much tax you owe. 

 

Your Self Assessment needs to be done by the 31st of January after the end of the tax year. Tax years span from 6th April to 5th April so each time you only need to report on activity between those dates. It can all be done online including the tax payment to HMRC. 

How much tax will I pay?

It’s useful to have an idea of how much taxes you’ll owe at the end of the year so you can make sure you have enough saved away. Remember you only pay tax on profits which is your earnings minus your allowable expenses (covered in a sec). 

 

There are some key benchmarks to keep in mind. Everyone has a Personal Allowance which is an amount of money you can earn that isn’t taxed. For the tax year of 2023-24, this number is £12,570 but it could change in the future. 

 

Anything earned above the Personal Allowance is taxed according to 3 tax bands:

• Basic rate – earning between £12,571 and £50,270 are taxed at 20%
• Higher rate – earnings between £50,271 and £125,140 are taxed at 40%
• Additional rate – earnings over £125,140 are taxed at 45%

 

Again these bands are subject to change alongside other factors in the tax system so keep on top of your bookkeeping and how your situation relates to any changes in taxes. Otherwise, you may get caught out at the end of the tax year!

 

You’ll no doubt fall under the basic rate in your first year (but who knows) and I advise you put away 30% to cover the payment on account you’ll need to make.

Understanding National Insurance Contributions

National Insurance is calculated separately from the rest of the tax you pay because NI contributions allow you to qualify for certain benefits such as your State Pension. It is calculated in different classes, depending on income and employment status. 

 

Self-employed people with profits over their Personal Allowance of £12,570 usually pay Class 2 and Class 4 NI. As of the tax year 2023-24 the rate of Class 2 NI contributions is £3.45 a week. Class 4 rates are 9% on profits between £12,570 and £50,270 and 2% on profits over £50,270. Always check the government website for updated Self-Employed NI rates. It is a good idea to voluntarily pay Class 2 NI even if you are under the threshold as this supports the level of State Pension you are entitled to. 

 

HMRC does have a National Insurance Calculator to help you figure this out. 

Essential Tax Deductions for Virtual Assistants

As tax and NI are based on your profits (income minus expenses), you need to carefully keep track of the spending in the business and what can actually be deducted from your taxable income i.e. what’s essential spending. If you’re ever in the situation where HMRC is investigating you, you will need proof of these expenses for up to 6 years previously. 

 

The expenses you can deduct from your taxable income as a self-employed person that are particularly pertinent to Virtual Assistants include:

 

• Office costs such as buying a new laptop for client work
• Staff costs such as paying associates to help you with client work
• Advertising and marketing such as the payment for your website

 

The rest can be found on the HMRC A-Z of expenses. There is accounting software that can help you keep track of income and expenses and predict tax owed, giving you an accurate picture of where you stand financially. 

VAT Registration: When and Why?

In the online business world, you may have heard people talk about being VAT registered. Don’t panic, this isn’t something you necessarily need to do. But it can actually be quite helpful. It’s only a requirement if your taxable income in the last 12 months amounts to over £85,000. You can voluntarily register if you are below that threshold and want to enjoy the benefits. Whether you are a sole trader or a limited company, you can register online. 

 

When you are VAT registered:

• You have to charge VAT within your pricing and that money goes straight to HMRC
• You can claim back the VAT you’ve paid when purchasing other items

 

That means if the money you could claim back is a significant amount, it could be worth becoming VAT registered before you reach the threshold. It’s worth considering whether the businesses you work with tend to be VAT registered. If so, they can claim back the extra 20% of VAT in your pricing. If not, being VAT registered will leave your clients an extra 20% out of pocket. 

Getting Professional Help: When to Hire an Accountant

As a rule of thumb, if you’re unsure about what you should be doing, reporting and paying, consult a professional. There are specialised tax accounts. With the possibility of being investigated by HMRC and fined as well as the major stress it can cause, you don’t want to risk messing it up. 

 

For the first year or so, most sole trader VAs can manage the bookkeeping and Self Assessments themselves. When you’re getting behind on bookkeeping or taking on more reporting responsibilities by registering as a limited company, you’ll probably want a professional helping hand. 

 

A tax accountant can take the burden and stress of taxes off your shoulders. They also know a thing or two about being tax efficient which can save you a nice amount of money. When looking for an accountant, ask around for recommendations or browse trusted networks like The Association of Chartered Certified Accountants.

 

The best way to manage your tax payments and NI contributions is to stay on top of it. The worst thing you can do is bury your head in the sand! Do your bookkeeping every month. Get accounting software that helps you to predict what you’ll owe at the end of the year. Reference the UK government website for up-to-date benchmarks,  deadlines, calculators and other key information. Reach out for professional help as soon as you need it to clear things up ASAP. You’ve got this! 

 

I use and recommend FreeAgent for your accounting software. It comes free with certain bank accounts. I am a FreeAgent partner but I am not an affiliate so there is no monetary incentive for me recommending the software.