Yes, even a personal finance blogger makes financial mistakes. 😳
And I recently made my first financial mistake. Financially it didn’t cost me much (about £150), but if I wasn’t fixing it now it could have cost me £700+. It did also cost me in stress, energy and confusion, but did teach me some very important lessons.
And so I thought I would share this mistake, so others could learn and not make the same one. The great benefits of having a blog. 😏
A bit of a background - making money online
I’ve been making money online for some time now (I started at like 16), but didn’t start seriously until around September of 2017. As described in the money making skills post, I was writing blog posts, translating and doing some general digital marketing. I wasn’t making much, but it helped me get by.
Fast forward 1 year to September 2018 - I’m making a little more money online and it’s quite steady. I have big dreams for Financially Mint. A friend tells me I should create a Limited company to make the blog official and treat is a company. I think; why not? 😎 So without thinking too much, I go to the Gov.uk website and create a Limited company called Financially Mint Ltd, open a business bank account with Starling (for free, thank Jesus) and decide to process all my freelance work through the Ltd. I get an exciting letter in the post announcing that I am director of Financially Mint. It’s all pretty amazing - I officially have my own business!
Turns out, it wasn’t the most financially savvy thing to do. 🙄
My financial mistake
The mistake was basically that I had not assessed the difference between trading as a sole trader (so self-employed) and trading as an Ltd. Depending on how much money you’re making, the pros and cons can be very different. Note the depending on how much you’re making. My friend was obviously making some good money online and it was totally worth it for him. I wasn’t really going full on, and was making around £200-£400 a month online. And currently at my my main job, which is an internship, I’m also making under £1,000 per month - so as you can imagine, the figures aren’t huge. This is important when assessing tax situations. Why? Let’s compare Ltd vs Sole trader:
When managing an Ltd: you pay corporate tax on your profits, and then income tax on the money you pay yourself. This income tax, you pay by setting it up through a PAYE scheme (it’s called a director’s salary), which gets a little complicated because then you have to pay National Insurance. You can also pay through dividends, which must be paid after profits and recorded officially (you also get an allowance). You can also take money out as a Director’s Loan or simply as expenses. So as you can see, there are a lot of options and I had no idea what I was doing. And it turns out you also need to hire an accountant to file your corporate tax return for you (although I think this is now changing, not 100% sure).
When self-employed: I pay income tax on what I earn, I can complete the self-assessment myself.
The important thing also to note is the magical Personal Tax Allowance of £11,850 per year. You only start paying tax after you make more than £11,850. This allowance means a lot to me, since I ain’t making much. Well turns out corporation tax doesn’t care about allowance, meaning I would have to pay corporation tax no matter what, and then pay myself through dividends. And since my expenses were low, all my profit was taxed. This wouldn’t matter as much if I was making a ton of money through my main job, but turns out I’m not.
Also, according to some accountants I met up with, hiring an accountant to do my company tax return would cost around £700, which is a bit of a blow to my already small earnings.
So there you go - I’m better off trading as a sole trader than through an Ltd. An Ltd would be worth it if I was in the higher tax bracket through my main job, paying 40% in taxes every year and earning over £46,351, but since I’m still scraping after the tax allowance, it’s not worth it.
I am now in the process of closing the Ltd, which is a bit of a headache since I did not keep the right files and have some numbers missing. I’ve closed the business bank account, applied to Companies House to close the company and now I also will need to cough up the corporation tax (which is about £150, so cash cushion will give me a hand). 😛
Lessons learnt
Do your research before taking the leap
It’s always sounds good when you’re the brave one taking the leap - but then not so much when you realise it’s a mistake. A message to myself: don’t scan the research; print, read properly, ask for advice online before taking the leap.
Talk to experts before making a big financial move
I did talk to experts, but after making the move - this is how I figured out it was better to close the Ltd. A lot of people will tell you that good advice does not come cheap, which is totally true. My recommendation: either pay nothing (so a free consultation) or pay expensive. Do not budget on good advice.
TRACK EVERYTHING
This one really pisses me off. Every single document that HMRC sent you should be scanned/photographed and put up online. Every single bank transaction, payment should be tracked through an accounting software. Every. Single. Thing. As you can imagine, I didn’t do that.
Learn the basics of accounting
Even if you’re making a couple hundred a month online, I recommend recording transactions through an accounting software (I use Xero) and learning how it works. This software will create your balance sheets, profit and loss statements and all the rest, so you don’t have to. But it’s still important you understand exactly how it works so you don’t end up editing and classifying transactions in the future #me.
So there you go; my first financial mistake in a nutshell. Not huge, but still decent enough to produce admin work and teach me a few lessons. It’s also allowed me to be grateful to be self-employed in the UK, where everything is relatively simple and more efficient than in other countries (hem hem Spain). So my recommendation to you whichever country you live in, is to track your online money making activities to the cent, and set up the correct system so you pay tax in the most efficient way. Open a business account for free through Starling or Revolut (you don’t have to have an Ltd to do this), and make all the transactions go through that account. The sooner you start, the fewer headaches you’ll have later!
