Community

Ember Digital Limited is registered with the Financial Conduct Authority under the Payment Services Regulations 2017 (register no. 919397) for the provision of account information services. Registered in England and Wales No. 11822163.

Explore

Legal

Capture and categorise expenses on the go.

File Annual Accounts and Corp Tax Returns

See Gross Salary, PAYE, NIC and Pensions.

Take the trouble out of personal tax returns.

Company Formation

Everything you need to know about National Insurance, from what it is and why we pay it, to who needs to pay it and how much needs to be paid.

The Complete Guide to National Insurance

<div><b>This article was updated 28th April 2023.</b></div>
<div><p>Whether you're an employee, business owner or <b><a href="https://ember.co/content/article/do-i-need-to-pay-national-insurance-as-a-sole-trader" class="text-red-400">self-employed sole trader</a></b>, you'll legally need to pay National Insurance contributions if you're earning above a certain amount. But what even is National Insurance, and where does the money go?</div></p>

In this article, we’ll be covering everything you need to know about National Insurance, from what it is and why we pay it, to who needs to pay it and how much needs to be paid.

National Insurance (NI) is a tax on earnings and self-employed profits, and is paid by employees, employers and self-employed sole traders to qualify for certain benefits and the State Pension.

<div><p>National Insurance is usually taken as a deduction at source under Pay As You Earn (PAYE) if you're an employee or limited company director. However, if you're a self-employed sole trader, you'll pay your National Insurance contributions alongside the <b><a href="https://ember.co/content/article/payments-on-account-paying-your-taxes-as-a-sole-trader-or-limited-company" class="text-red-400">payments on account</a></b> you make towards your Income Tax bill.</div></p>

At the time of writing, National Insurance is mandatory if you're 16 or over and are either a:

 Self-employed individual and making a profit of more than £12,570 a year

<div><p>If you're an employee earning between <b>£123-£242 a week</b>, or a self-employed individual with profits between <b>£6,725 and £12,570 a year</b>, you won't need to pay National Insurance, but you can still qualify for benefits and the State Pension. Here, your contributions are treated as paid to protect your National Insurance record, but you can make <b><a href="https://ember.co/content/article/voluntary-national-insurance-contributions" class="text-red-400">voluntary National Insurance contributions</a></b> to plug the gaps if you wish.</div></p>

If you are still earning by the time you reach State Pension age, you will no longer need to make National Insurance contributions — meaning that, as a result, you’ll see an increase in your take-home pay. However, when exactly you stop paying National Insurance depends on the type of employment you’re in, which we’ll cover in further detail below.

Aside from being a legal requirement if you are eligible to pay National Insurance, a gap in your National Insurance contributions record could affect the state benefits that you are entitled to, such as the State Pension.

You might be able to apply for National Insurance credits if you cannot work, for example if you cannot work due to illness or if you are a carer for someone.

<div><p>For most workers, National Insurance is deducted at source by their employer through <b><a href="https://ember.co/content/article/what-does-paye-mean" class="text-red-400">Pay As You Earn (PAYE)</a></b>, with the total amount deducted displayed on the employee’s payslip.</div></p>
<div><p>For self-employed sole traders and limited company directors, however, your National Insurance is paid when you pay your <b><a href="https://ember.co/content/article/self-assessment-tax-return-a-definitive-guide-for-sole-traders" class="text-red-400">Self Assessment tax bill</a></b> on 31st January every year.</div></p>

<div><p>To pay your National Insurance, you’ll need to make sure you have a <b><a href="https://ember.co/content/article/what-is-a-national-insurance-number" class="text-red-400">National Insurance number</a></b>, a unique code assigned to you made up of a combination of letters and numbers that matches you to your tax records. You can find your NI number on one of the following documents:</div></p>

<div><ul>
<li>Your payslip</li>
<li>Your <b><a href="https://ember.co/content/article/what-is-a-p60" class="text-red-400">P60</a></b></li>
<li>On letters about your tax, pension and benefits</li>
<li>In the National Insurance section of your personal Government Gateway account</li>
</div></ul>

<div><p>You should automatically be given a National Insurance number if you are a UK citizen just before you turn 16, but you can apply for a National Insurance number if you don’t have one at <b><a href="https://www.gov.uk/apply-national-insurance-number" class="text-red-400">GOV.UK</a></b>.</div></p>

You cannot, however, request a new National Insurance number if you lose yours, so be sure to keep your National Insurance number safe to protect yourself from identity fraud.

How much National Insurance do I need to pay?

The total amount of National Insurance you need to pay comes down to three key factors: the National Insurance class you fall into, the amount you earn and the National Insurance rate for the tax year in question.

The first factor, the National Insurance class that you fall into, is determined by your employment status. As mentioned above, if you’re not earning you won’t be paying National Insurance, but can pay voluntary National Insurance contributions to avoid gaps in your National Insurance record.

The National Insurance classes and the employment status of those who fall into each category are outlined below:

<div><table>
<tr><th>National Insurance class</th><th>Who pays</th></tr>
<tr><td>Class 1</td><td>Employees earning more than £242 a week and under State Pension age</td></tr>
<tr><td>Class 1A or 1B</td><td>Employers pay these directly on their employee's expenses or benefits</td></tr>
<tr><td>Class 2</td><td>Self-employed people earning profits of £12,570 or more a year</td></tr>
<tr><td>Class 3</td>Voluntary contributions (can be paid to fill or avoid gaps in your National Insurance record</td></tr>
<tr><td>Class 4</td><td>Self-employed people earning profits of £12,570 or more a year</td></tr>
</div></table>
<div><p><em>Source: <a href="https://www.gov.uk/national-insurance/national-insurance-classes" class="text-red-400">GOV.UK</div></p>

National Insurance contributions for the 2023/34 tax year

<div><table>
<tr><th>Your pay</th><th>Class 1 National Insurance rate</th></tr>
<tr><td>£242 to £967 a week (£1,048 to £4,189 a month)</td><td>12%</td></tr>
<tr><td>Over £967 a week (£4,189 a month)</td><td>2%</td></tr>
</div></table>

<div><table>
<tr><th>Class</th><th>Rate</th></tr>
<tr><td>Class 2</td><td>£3.45 a week</td></tr>
<tr><td>Class 3</td><td>£17.45 a week</td></tr>

<div><p><b>Note:</b> If you're paying Class 2 contributions for the previous tax year or Class 3 contributions for the previous 2 tax years, you'll need to pay the original rate for those tax years. You can find these rates at <b><a href="https://www.gov.uk/voluntary-national-insurance-contributions/rates" class="text-red-400">GOV.UK</a></b>.</div></p>

<div><table>
<tr><th>Threshold</th><th>£ per year</th><th>Rate</th></tr>
<tr>
<td>Lower Profits Limit</td>
<td>£12,570</td>
<td>9%</td>
</tr>
<tr>
<td>Upper Profits Limit</td>
<td>£50,270</td>
<td>2%</td>
</tr>
</table></div>

<div><p>While the National Insurance hikes might be enough to set any self-employed sole trader on edge, <b><a href="https://ember.co/" class="text-red-400">Ember</a></b> has your back. By combining easy automation with the expertise of our qualified accountants, we’ll make sure you get the all tax breaks you’re entitled to, helping you get more of your money back.</div></p>

Find out what VAT receipts are, why they're crucial to your VAT records and how to safely store them.

What is a VAT receipt?

Simple language, simple software, so that you can spend less time dealing with admin and more time focusing on what really matters.

Join us in creating the new age of accounting.

Chances are the last transaction you made features a VAT charge. You only need to take a closer look at your receipt to spot it.

VAT is part of our daily lives, both as consumers and business owners. As a business owner, you’ve probably been advised to keep hold of your VAT receipts. And rightfully so — keeping digital VAT records is a legal requirement for VAT-registered business owners.

This isn’t to bury you in piles of unnecessary paperwork. For companies looking to claim back the VAT on goods and services they’ve bought for the business, they must supply valid VAT receipts. That’s why it’s important to understand what a valid VAT receipt looks like, as well as the best practices for record keeping.

With this in mind, read on for an overview of VAT receipts. One that’s relatively simple to get your head around.

VAT receipts show what you’ve bought from a supplier and how much VAT you’ve paid.

Under UK law, any VAT-registered business must provide their customers with a VAT receipt. That means you’re legally allowed to request one, as are your customers.

It’s also important to store your VAT receipts safely, as you’ll need them when submitting your VAT return. These will evidence the total amount of VAT you’ve paid, and make sure that your tax bill or tax rebate is as accurate as possible.

For some transactions, such as telephone calls and commercial tolls of £25 or less, you’ll be able to claim back VAT without a receipt.

<div class="md:block hidden">
<script type="application/ld+json">
{
  "@context": "https://schema.org",
  "@type": "VideoObject",
  "name": "What is a VAT receipt? | Ember",
  "description": "One of the main benefits of being a VAT registered business is the ability to claim back the VAT you’ve paid on the goods and services needed to run your business. However, to successfully make a claim, you’ll need to make sure you have any VAT receipts you’ve collected close to hand. But what is a VAT receipt?",
"contentUrl": "https://www.youtube.com/embed/TePmwz9Ru9g",
  "thumbnailUrl": "https://www.youtube.com/embed/TePmwz9Ru9g",
  "uploadDate": "2023-04-27"
}
</script>
<iframe width="640" height="360"
src="https://www.youtube.com/embed/TePmwz9Ru9g">
</iframe>
</div>
<div class="md:hidden block">
<script type="application/ld+json">
{
  "@context": "https://schema.org",
  "@type": "VideoObject",
  "name": "What is a VAT receipt? | Ember",
  "description": "One of the main benefits of being a VAT registered business is the ability to claim back the VAT you’ve paid on the goods and services needed to run your business. However, to successfully make a claim, you’ll need to make sure you have any VAT receipts you’ve collected close to hand. But what is a VAT receipt?",
"contentUrl": "https://www.youtube.com/embed/TePmwz9Ru9g",
  "thumbnailUrl": "https://www.youtube.com/embed/TePmwz9Ru9g",
  "uploadDate": "2023-04-27"
}
</script>
<iframe width="310" height="160"
src="https://www.youtube.com/embed/TePmwz9Ru9g">
</iframe>
</div>

To better understand why you might request a VAT receipt, we'll dive into what VAT is and how it works.

<div><p><b><a href="https://ember.co/content/article/what-is-vat" class="text-red-400">VAT</a></b>, otherwise known as ‘Value Added Tax’, is a consumer tax applied to anything classified as a <b>taxable supply</b>, such as the sales of goods, services and assets.</div></p>

If your suppliers or manufacturers are VAT-registered, you’d have been charged input VAT on every purchase you’ve made from them.

<div><p>If your business is VAT-registered — whether that’s because you’ve registered voluntarily, or have surpassed the £85,000 <b><a href="https://ember.co/content/article/vat-registration-threshold" class="text-red-400">VAT registration threshold</b></a> — you’ll need to charge your customers VAT on the items you sell, known as output VAT.</div></p>

<div><p>The idea is that eventually you break even, reclaiming the input tax paid towards your supplier from the output tax paid by your consumers. When filing your VAT return, you’ll need to keep track of these figures, with the difference between your output VAT and input VAT determining either what your final <b><a href="https://ember.co/content/article/how-to-pay-your-uk-vat-bill" class="text-red-400">VAT bill</a></b> looks like, or how much you can expect in a VAT refund.</div></p>

<div><p>Keep in mind that some goods and services are not charged VAT, yet depending on the item may need to be included in your VAT return. For the differences between zero-rated goods, out-of-scope goods and VAT exempt goods, head over to our guide to <b><a href="https://ember.co/content/article/vat-exemption" class="text-red-400">VAT exemption</a></b>.</div></p>

What’s the difference between a VAT receipt and a VAT invoice?

Broadly speaking, a VAT invoice is the same thing as a VAT receipt, yet VAT invoices tend to be used to record business expenses more frequently than VAT receipts.

For example, if you were to buy a laptop for £500 as an individual for personal use, you’d be issued a receipt from the till which would state the rate of VAT you’d paid. However, if you’d spent the same amount on a laptop for business use, you’d be issued a VAT invoice, too.

There are slightly different rules when it comes to retailers selling goods for under £250. In this instance, a retailer can issue a simplified VAT invoice, and will only need to issue a full VAT invoice if the customer requests one.

To successfully reclaim VAT, you’ll have to present the original purchase receipt to HM Revenue and Customs (HMRC), otherwise known as the VAT invoice.

A valid VAT receipt will include the following details:

<div><ul>
<li><b><a href="https://ember.co/content/article/what-is-a-vat-number" class="text-red-400">VAT registration number</a></b> of seller</li>
<li>A list of the purchased goods</li>
<li>Unique <b><a href="https://ember.co/content/article/what-is-an-invoice-number" class="text-red-400">invoice number</a></b></li>
<li>Business address of both the buyer and seller</li>
<li>Tax date (date of supply)</li>
<li>Business name of both the buyer and seller</li>
<li>Receipt issuance date</li>
</div></ul>

If any of this information is missing or incorrect, you might not be able to claim back VAT. Further examples of VAT receipts that aren’t valid include: delivery notes, letters or emails.

<div><p>Take some time to check over your invoices to save yourself a future headache. Or, <b><a href="https://ember.co/book-accountant-call" class="text-red-400">get in touch with our accountants</a></b> instead — we’ll happily take the weight off your shoulders.</div></p>

What does a simplified VAT receipt look like?

Not every VAT receipt needs to include all of the above details. If requested, retailers can issue simplified VAT receipt for sales under £250 including VAT.

Simplified VAT receipts are shorter, but they still provide the customer with everything that is legally required.

<div><ul>
<li>Supplier name and business address</li>
<li>Supplier <b><a href="https://ember.co/content/article/what-is-a-vat-number" class="text-red-400">VAT registration number</a></b></li>
<li>Date of supply, or the <b>tax point</b></li>
<li>A description of the goods or services supplied</li>
</ul></div>

<div><p>If the sale includes items charged at different VAT rates, then the simplified VAT receipt must also show the VAT rate applicable to each different item, as well as the total price including VAT. <b><a href="https://ember.co/content/article/vat-exemption" class="text-red-400">VAT exempt supplies</a></b>, such as postage stamps, must not be included on simplified invoices or modified VAT invoices.</div></p>

It’s easy to lose VAT receipts, especially if you’ve just bought something small or from a local corner shop.

HMRC will accept alternative evidence if you have lost a few VAT receipts of small value (i.e. the odd £10). In these instances, you’ll need to support your claim with alternative information, e.g. a bank statement or credit card, as proof of payment.

If you’re losing VAT receipts a lot, though, then you should practice some good record-keeping. Read on — we’ve got you covered.

Keeping hold of valid VAT receipts means that you’ll be able to prove how much VAT you’ve paid. And how much you’ve legally claimed back on your VAT returns, in case of inspection.

💡Top tip: If you’ve paid VAT on a business expense, be sure to check the receipt for the VAT you’ve been charged. More often than not, business owners walk away from a transaction with receipt in hand, only to find the VAT isn’t actually included on the receipt. If you can’t find the VAT you’ve been charged on the receipt, be sure to request a VAT receipt from the supplier as soon as possible.

Every VAT-registered business must keep a VAT account. This will be a huge help when it comes to filling out your VAT return.

You can keep the VAT account whichever way suits your business best, but here’s the information you’ll need to track:

<div><ul>
<li><b>Output tax</b> owed on sales</li>
<li><b>Output tax</b> owed on acquisitions made before 1 January 2020 (for those registered in Great Britain)</li>
<li>Tax you’re required to pay on behalf of a supplier under a <b>VAT reverse charge procedure</b></li>
<li>Tax that needs to be paid following a correction or error adjustment</li>
<li>Any other <b><a href="https://www.gov.uk/guidance/record-keeping-for-vat-notice-70021#adjusting-vat-account" class="text-red-400">adjustment</a></b> required by the VAT rules</li>
<div></ul>

<div><p>💡Did you know you can generate, review and submit your VAT Returns directly to HMRC from your Ember account? <b><a href="https://ember.co/" class="text-red-400">Give us a go today</a></b>.</div></p>

VAT accounts vary from business to business, but here's an example of what yours might look like:

<div><table>
<tr>
<th>Input tax</th>
<th>£</th>
<th>Output tax</th>
<th>£</th>
</tr>
<tr>
<th>VAT paid on business expenses</th>
<th></th>
<th>VAT charged on sales</th>
<th></th>
</tr>
<tr>
<td>January</td>
<td>2,215.23</td>
<td>January</td>
<td>2,780.23</td>
</tr>
<tr>
<td>February</td>
<td>1,626.47</td>
<td>February</td>
<td>2,305.81</td>
</tr>
<tr>
<td>March</td>
<td>2,792.01</td>
<td>March</td>
<td>3,302.45</td>
</tr>
<tr>
<td>Sub-total</td>
<td>6,633.71</td>
<td>Sub-total</td>
<td>8,388.49</td>
</tr>
<tr>
<td>Other adjustments (specify)</td>
<td></td>
<td>Other adjustments (specify)</td>
<td></td>
<tr>
<tr>
<td>Total tax deductible</td>
<td>6,633.71</td>
<td>Total tax payable</td>
<td>8,388.49</td>
</tr>
<tr>
<td></td>
<td></td>
<th>Payable to HMRC</th>
<td>1,754.78</td>
</tr>
</table></div>

This can then be used to fill in your VAT Return. Your VAT return and payment are both due within a month after your accounting period ends.

You must keep a copy of every VAT invoice you issue, and VAT receipt you’re given, for up to 6 years.

If you’re not able to present valid VAT invoices, HMRC could demand you pay back the VAT you’ve claimed, alongside any penalties they may charge.

<div><p>Not only is storing <b><a href="https://ember.co/content/article/vat-records-making-tax-digital" class="text-red-400">digital VAT records</a></b> paramount to keeping organised, it's also core to <b><a href="https://ember.co/content/article/making-tax-digital" class="text-red-400">Making Tax Digital</a></b> for VAT. As of <b><a href="https://ember.co/content/article/making-tax-digital-timeline" class-"text-red-400">April 2022</a></b>, <b><a href="https://ember.co/content/article/do-i-need-to-register-for-making-tax-digital" class="text-red-400">all VAT-registered business owners</a></b> must store digital records and file their VAT returns electronically, unless you are exempt.</div></p>

<div><p>Since paper records are a thing of the past under MTD, you’ll need to store your VAT receipts digitally using <b><a href="https://ember.co/content/article/mtd-for-vat-online-software" class="text-red-400">MTD-compatible accounting software</a></b>. If you're looking for a MTD-compliant VAT digital software, look no further than <b><a href="https://ember.co/content/article/ember-making-tax-digital-for-vat" class="text-red-400">Ember</a></b>. We’d love to help out.</div></p>

A simple guide on how to find work as a freelancer, for new business owners.

How to find work as a freelancer

Whether you’re shifting to self-employment or setting up a side-hustle, starting out as a freelancer is a big step for any aspiring solopreneur.

However, irrespective of how talented you are at your craft, your business won’t be a success unless you find clients looking to use your services. Over time you might find clients will come to you, but this is only likely to happen if you put the groundwork in now.

In this article, we’ll be not only go into finding work as a freelancer, but also how to spot — and secure — high-quality gigs that’ll benefit your small business in the long term.

If you’re stuck for where to start your job search, you’re in luck: there are countless freelance job boards and freelance marketplaces out there that you can use to search for job opportunities and advertise your services to potential clients.

For many of these, you can set up your own profile with a short bio and a link to your portfolio, making it easier for clients seeking out the services you offer to find you. It’s also worth seeing if these platforms offer networking events or short courses to help you further your career while searching for opportunities.

Some of the most popular freelance job sites in the UK include the following:

<div><ul>
<li><b><a href="https://www.fiverr.com/" class="text-red-400">Fiverr</a></b></li>
<li><b><a href="https://www.upwork.com/" class="text-red-400">UpWork</a></b> (formerly Elance-oDesk)</li>
<li><b><a href="https://www.peopleperhour.com/" class="text-red-400">PeoplePerHour</a></b></ki>
<li><b><a href="http://freelancer.co.uk/" class="text-red-400">Freelancer</a></b></li>
<li><b><a href="https://www.behance.net/" class="text-red-400">Behance</a></b></li>
<li><b><a href="https://dribbble.com/" class="text-red-400">Dribbble</a></b></li>
<li><b><a href="https://workingnotworking.com/" class="text-red-400">WorkingNotWorking</a></b></li>
<li><b><a href="https://www.flexjobs.com/" class="text-red-400">FlexJobs</a></b></li>
</div></ul>

Some things to consider when using freelance job sites

While these sites have plenty of job listings on offer, keep in mind that competition on these freelance websites are fierce, so you may have to lower your rates to stay competitive.

However, if you’re new to freelancing these low-paid positions could be just what you need to build up a portfolio, as well as introducing you to potential repeat, long-term clients.

It’s also worth noting that while some freelance platforms are free to use, others will take a fraction of your earnings — usually between 5% to 20% — or charge a monthly fee to use their site.

If you’ve left full-time employment to pursue your freelancing career, you might think you’ve left the likes of Reed, Indeed and LinkedIn far behind. However, sometimes companies will post short-term freelance jobs for work that isn’t sufficient enough to hire a full-time employee, so be sure to keep scouring these sites in case any new job postings pop up.

Make sure that any applications you send are tailored to the role you’re applying to, with your CV showcasing relevant experience and any work submissions are related to the position in question.

Sometimes as a freelancer it’s possible to make your own luck. While cold calling and cold emailing might feel daunting at first, you might find it an effective way to find new clients.

If you’re starting out you might find it helpful to start small, sending a tailored email, a copy of your CV and a few snippets of your portfolio over. After you’ve got some experience under your belt, you can then turn your attention to larger brands that can offer high-quality, high-paying jobs.

Not only is this method of marketing your services practically free, but it’s also a great way to make it widely known that you’re open for business.

Start by sharing with friends and reach out to industry connections to let them know you’re available. While they may not need your services straight away, if someone asks them for recommendations, there’s a good chance you’ll be at the top of their list.

Once you’ve started getting work, encourage happy clients to spread the word, whether it’s by asking them to pass on your details to someone else who might need your services or by writing a testimonial for you to post on your website (if you have one — we’ll cover that later).

To take this one step further, consider setting up a referral scheme by offering small discounts for clients who refer you to others, alongside an introductory discount to the person referred.

Irrespective of the work you’re doing, one of the best ways to attract clients is by having a solid brand. Whether it’s a prospect who’s been referred to you or a potential client who’s stumbled across you online, you’ll want to make sure they can get a good idea of the work you do and how well you can do it.

If you’re looking to land roles in the creative sector, you’ll want to make sure you have a good website showcasing your work. If you’re a freelance writer or copywriter, SEO-rich blogs are a must-have, and visual websites with galleries are perfect for showcasing your best work if you’re a freelance designer, web designer, graphic designer or illustrator.

Alongside examples of your work, make sure you have a page on your website with your contact information readily available.

Similar to the above, a strong presence on social media makes it easy for potential customers to get a glimpse into the work you do. Consider posting snippets of your work on Twitter, or use your Instagram page as a “shop window” for your design work. Don’t forget to update your bios to include links to further examples of your work!

Not only is this a great way to showcase your work, but you can use social media to find jobs, networking opportunities and workshops that’ll help improve your skillset.

Once you’ve set up your professional social media page, there are a few things you can do to make the most of social media:

Post on LinkedIn and Twitter about when you’re available for freelance work — and when you’re fully booked too

Follow hashtags relevant to your industry for jobs, career insights and events

Get to know other freelancers working in your niche, as they may be able to recommend you to clients if they’re too busy with other work

Interact with the companies and agencies you’d be keen to work for

Share client testimonials and examples of your work with both relevant and searchable hashtags to draw attention to your pages

A freelancer is someone who works for themselves on either a full-time or part-time basis, often working for on several jobs for more than one client at the same time.

You can find freelancers working in practically any field, from freelance writing to content marketing to project management, with some freelancers specialising in a particular niche or industry.

Unlike full-time employment, freelancers are free to set their own rates and work their own hours, with work opportunities ranging between one-off freelance gigs to prolonged stints for returning customers.

What’s the difference between a freelancer and a sole trader?

<div><p>Despite both freelancers and sole traders fall under the self-employment category, the terms are not interchangeable. A <b><a href="https://ember.co/content/article/sole-trader-vs-limited-company" class="text-red-400">sole trader</a></b> is a self-employed individual who, in the eyes of HM Revenue and Customs (HMRC), is seen as a singular legal entity with their small business. In short, this means that sole traders are entirely in control of their businesses and can keep all profits after tax, but are wholly liable if something goes wrong.</div></p>

<div><p><b><a href="https://ember.co/content/article/difference-between-freelance-self-employed-and-sole-trader" class="text-red-400">Freelancers can operate as sole traders</a></b>, with many beginners starting out this way since <b><a href="https://ember.co/content/article/getting-started-as-a-sole-trader" class="text-red-400">setting up as a sole trader</a></b> is relatively straightforward. However, more established freelancers with multiple long-term clients may find it more tax-efficient to operate as a <b><a href="https://ember.co/content/article/what-is-a-limited-company" class="text-red-400">limited company</a></b>.</div></p>

<div><p>If you’re not sure which business structure is best for your freelance business, you can use our <b><a href="https://ember.co/calculator/sole-trader-vs-limited-company" class="text-red-400">Sole Trader vs. Limited Company Savings calculator</a></b> to work out which business structure will save you the most on tax.</div></p>

Made a mistake on your VAT return? Here's how you can correct VAT errors and make any adjustments you need to.

How to correct VAT errors and make adjustments

Mistakes can happen, after all we’re only human. This applies to tax and accounting too.

When it comes to filing your VAT return, it can be easy to overlook inaccuracies or accidentally calculate a number incorrectly.

Should you find yourself in this situation, the first step is not to panic — it’s not as difficult to correct errors in your VAT records as you may think. As long as the corrections you’re making comply with certain conditions, you don’t even need to tell HM Revenue and Customs (HMRC) — you can simply put them right by adjusting your next VAT return.

In this article, we’ll explore how to correct VAT errors and make adjustments on VAT returns for an earlier period. We’ll also cover reporting thresholds, define what qualifies as a reportable mistake and outline the types of errors that could result in an HMRC penalty.

What is the reporting threshold for VAT correction?

When it comes to reporting net errors for VAT returns, the threshold figure you need to remember is £10,000. Any net errors that don’t exceed £10,000, as well as satisfy the other adjustment conditions, can be corrected by adjusting your next VAT return.

Errors with a net value of more than £10,000 up to a maximum of £50,000 can also be adjusted via your next VAT return, providing the error is not more than 1% of the Box 6 figure (total value of sales and all other outputs, excluding any VAT).

Any VAT error that exceeds the reporting threshold must be reported to HMRC. They cannot be corrected by making a VAT adjustment in your next VAT return.

Note: Always take extra care with VAT corrections that fall in a later financial year than the original transactions. You may need to make adjustments to the annual accounts in which the error arose.

As already mentioned, providing your error meets certain criteria, you can correct a mistake you’ve made in a previous VAT return by making an adjustment to a future VAT return. This is referred to by HMRC as a VAT notice 700/45.  In order to do this:

The error must have been made in a return for an accounting period that ended less than 4 years ago

The error must have a net value (any VAT you overpaid minus any VAT you underpaid) that falls below the HMRC reporting threshold of £10,000

The error must not have been intentional (any deliberate errors must be notified to HMRC)

The net value of the error must be between £10,000 and £50,000, but less than 1% of the sales you reported in box 6 of the VAT return for the period in which you discovered the mistake

You can calculate the net value of errors by subtracting any VAT you’ve overpaid from any VAT you’ve underpaid.

If your mistake meets these criteria, then you can amend them in your next VAT return by adding the net value to Box 1 (tax owed to HMRC) or Box 4 (tax due to your business) of your VAT return.

However, for any errors on your VAT return that don’t meet these criteria, you’ll need to contact HMRC to report them. If you have any doubts, you should always seek advice from an accountant.

<div><p>Further information on the Notice 700/45 VAT adjustment process can be found at <b><a href="https://www.gov.uk/guidance/how-to-correct-vat-errors-and-make-adjustments-or-claims-vat-notice-70045" class="text-red-400">GOV.UK</a></b>.</div></p>

It isn’t possible to correct all errors by amending a VAT return. Any error which falls into the following criteria must be reported to HMRC:

Errors with a net value above the reporting threshold

Note: Any deliberate or careless errors may incur HMRC penalties.

Notification of errors in VAT returns to HMRC

If you find yourself in the situation of needing to report a VAT mistake to HMRC because it falls outside of the criteria for making a VAT adjustment, you’ll need to fill out a VAT652 form. 

<div><p>A <b><a href="https://www.gov.uk/government/publications/vat-notification-of-errors-in-vat-returns-vat-652" class="text-red-400">VAT652</a></b> form and it can be either be filled out online at GOV.UK, downloaded as a printable version or you can call the HMRC helpline on 0300 200 3700 and request a paper form in the post.</div></p>

It is also possible to file an error report to HMRC without using form VAT652, but completing the form will make the process much smoother for both you and HMRC. If you are unable to access a form, then you can write directly to HMRC to report a VAT error at:

What information should you include when reporting a VAT error?

When you notify HMRC of an error in your tax return, you should have the following information close to hand:

The VAT accounting period when the error occurred

Whether the mistake due to an input tax or output tax error

Whether your business underdeclared or overdeclared the amount of VAT in each VAT period

Whether any of the errors you are reporting have resulted in your business paying HMRC an amount that wasn’t due

The total amount of VAT that needs to be adjusted

How much you pay in penalties depends not only on the nature of the error itself, but also on how prompt and transparent you’ve been in reporting it to HMRC.

For instance, if HMRC considers the error to be a careless error, the penalty can range from 0% to 30% of the potential loss of revenue to HMRC, depending on how much you have disclosed and how quickly.

However, if HMRC determines that an error is ‘intentional and secret’, you could face a penalty of up to 100% of the potential loss of income incurred by HMRC.

As this can be a tricky area, even if your VAT adjustments don’t require you to make a voluntary disclosure, it can sometimes be advisable to make one, as it will give you extra protection from penalties.

<div><p>To minimise the risk of errors made in VAT returns, HMRC <b><a href="https://ember.co/content/article/making-tax-digital-timeline" class="text-red-400">introduced Making Tax Digital for VAT</a></b>, or MTD for VAT, to make it easier for VAT-registered small business owners and self-employed individuals to manage their tax returns.</div></p>

<div><p>Initially introduced in April 2019, business owners earning above the <b><a href="https://ember.co/content/article/vat-registration-threshold" class="text-red-400">£85,000 VAT registration threshold</a></b> were required to store <b><a href="https://ember.co/content/article/vat-records-making-tax-digital" class="text-red-400">digital VAT records</a></b> and file VAT returns using <b><a href="https://ember.co/content/article/mtd-for-vat-online-software" class="text-red-400">MTD-compatible software</a></b>.</div></p>

<div><p>In April 2022, this scheme extended to encompass all VAT registered businesses, irrespective of whether their taxable turnover is above the VAT registration threshold or not, excluding those eligible for <b><a href="https://ember.co/content/article/vat-exemption" class="text-red-400">VAT exemption</a></b>.</div></p>

<div><p>If you’re worried about making a mistake on your next VAT return, <b><a href="https://ember.co/" class="text-red-400">Ember’s here to lend a hand</a></b>. Not only will we register your business for VAT, but our team of expert accountants will draft, check and file your VAT returns for you.</div></p>

We'll dive into what a business tax account is, the benefits of setting up a business tax account and how you can keep on top of your taxes. 

What is a business tax account?

This article was updated 24th February 2023.

Whether you're an established business or have only just started your limited company, it's important to know when your financial deadlines are, which taxes you have to pay and how you can pay them to HM Revenue and Customs (HMRC)

To simplify staying on top of your taxes, HMRC has introduced business tax accounts to help business owners quickly access tax information and review any communications.

Companies of any size can set up a business tax account and can be made accessible to more than one member of the team, should multiple people be involved in managing the company's taxes.

In this article, we'll talk you through the benefits of setting up a business tax account, how to register for HMRC online services and where you can keep track of your taxes. 

A business tax account is an online tax account that puts all your business taxes together in one place.

In doing so, a business tax account allows you to keep better track of your company's finances and taxes, by making it easy to view a summary of your company's tax position, securely pay your taxes and receive any messages from HMRC.

An HMRC business tax account is separated into 2 areas:

A top menu that allows you to manage your account, view secure messages and get help

A business tax summary where you can complete tasks relating to tax payments and tax returns

In your business tax summary, you can access the online tax services you need with your Government Gateway ID.

If you're pressed for time, check out our overview of your business tax account and business tax summary in the video below.

<div class="md:block hidden">
<script type="application/ld+json">
{
  "@context": "https://schema.org",
  "@type": "VideoObject",
  "name": "What is a business tax account? | Ember",
  "description": "When running a business, knowing your current tax position — and subsequently keeping on top of your tax — is essential. Here’s where business tax accounts come in. In this video, we explain what a business tax account is, what a business tax account can tell you about your tax position, and what's included in your business tax summary.",
"contentUrl": "https://youtube.com/embed/BqbUEKw0o2E
  "thumbnailUrl": "https://youtube.com/embed/BqbUEKw0o2E
  "uploadDate": "2023-03-22T00:00:00+01:00"
}
</script>
<iframe width="640" height="360"
src="https://youtube.com/embed/BqbUEKw0o2E
</iframe>
</div>
<div class="md:hidden block">
<script type="application/ld+json">
{
  "@context": "https://schema.org",
  "@type": "VideoObject",
  "name": "What is a business tax account? | Ember",
  "description": "When running a business, knowing your current tax position — and subsequently keeping on top of your tax — is essential. Here’s where business tax accounts come in. In this video, we explain what a business tax account is, what a business tax account can tell you about your tax position, and what's included in your business tax summary.",
"contentUrl": "https://youtube.com/embed/BqbUEKw0o2E
  "thumbnailUrl": "https://youtube.com/embed/BqbUEKw0o2E
  "uploadDate": "2022-03-22T00:00:00+01:00"
}
</script>
<iframe width="310" height="160"
src="https://youtube.com/embed/BqbUEKw0o2E
</iframe>
</div>

Business tax accounts are available for limited companies, sole traders, partnerships – anyone who's in running a business! To use these HMRC's online services, head over to your business tax summary with your Government Gateway user ID and password to sign in.

You can use your HMRC business tax account yo:

Check your tax position for the taxes you've registered for

Give a team member access to a tax, duty or scheme

Update your contact details, Government Gateway user ID and security preferences

There are benefits to having a business tax account, such as:

Ability to send and receive secure messages from HMRC

As more and more businesses turn to online banking, HMRC are evolving their systems to better aid companies.

Business tax accounts are an easy way to access your taxes all in one place, where you can see what taxes need to be paid and the deadline for each tax you owe. The homepage also features a business tax summary and a place to complete tasks relating to payments and returns.

You can view secure messages from HMRC and receive help via a live web chat feature.

<div><p>HMRC <b><a href="https://www.gov.uk/government/news/tax-gap-falls-to-lowest-recorded-rate" class="text-red-400">reported</a></b> that £8.5 billion was lost in revenue from 2018-19 due to avoidable mistakes made by taxpayers. Business tax accounts can help minimise these losses by clearly laying out what you as a business need to pay throughout the year.</div></p>

You can sign up for paperless notifications, view and change your account details, such as your company email, Government Gateway ID and address, and update your security preferences.

There's also an option to deregister a tax duty or scheme if you no longer need to make returns. Your tax data will remain in the tax system, even if you have removed it from your business tax account.

You can set up a business tax account by following these simple steps:

Register for a business tax, such as Self Assessment, VAT or Corporation Tax. You may get a tax reference for your tax data.

Set up a Government Gateway user ID to get your organisation online.

Enter Activation Code, otherwise known as an Activation PIN, which you'll receive in the post within 10 days

<div><p><b>To get started, follow <a href="https://www.gov.uk/guidance/sign-in-to-your-hmrc-business-tax-account#already_using" class="text-red-400">this link to the HMRC website</a></b>.</div></p>

Aaron Shaw

co-founder & co-CEO

Articles from Aaron Shaw

Templates from Aaron Shaw