If you are a content creator in the UK, earning money from platforms such as YouTube, TikTok, Onlyfans or Twitch, you might be wondering if you need to pay tax on your earnings from these platforms.  The short answer is yes – when you start to make an income of over £1,000 per year from your content, you must register with HMRC and pay tax on your profits.
In this article, we will explore the consequences of failing to register your business with HMRC, the ways a content creator can register their business as well as the benefits and drawbacks of each business structure.
What happens if I do not register my business with HMRC?
Deliberately not declaring taxable income to HMRC is called tax evasion. In the instance of tax evasion being committed, either by accident or deliberately, the chances of HMRC letting you off the hook with no punishment is extremely unlikely!
HMRC’s main priority is to recover any unpaid tax. However, as they have had to go out of their way to collect the unpaid tax, they will most likely impose penalties and interest on the outstanding tax due. In severe cases, a fine for tax evasion could be anything up to 100% of the tax due. In the most extreme cases, individuals can face prison sentences for tax evasion.
How does HMRC know about undeclared income in the UK?
There are many ways HMRC can find out about undeclared income. As per our blog post, “The HMRC Side Hustle Crackdown“, from January 2024, HMRC can extract earnings information from online platforms and determine the annual earnings of their UK-based users. This information will be cross referenced to each individual or business’ tax return; and if there is a discrepancy, HMRC will launch an investigation into the offending entity.
HMRC may also decide to investigate if they have reason to suspect your tax return or tax credit application is incorrect or fraudulent.
HMRC’s new ability to analyse data from online platforms has caught out a lot of individuals who were not declaring their income from selling their content and collaborating with their audiences online.
What are the options available to content creators when setting up their business?
Many content creators begin their journey as a sole trader (self-employed). As a sole trader, you are responsible for reporting your profits and paying tax to HMRC. For more established content creators, there are multiple advantages to registering a limited company, such as reduced risk to personal assets and various tax savings.
Sole traders and limited companies are the most popular business structures in the UK and each have their own tax rates, rules and regulations. The main differences are the amount of tax you pay, personal liability for the business’ debts and the level of administration required.
What distinguishes a sole trader from a limited company?
Becoming a self-employed content creator
Being a sole trader is the easiest and quickest way to register your business and also comes with less admin. Being the sole proprietor, you have full control of the business and access to all of the profit. You are responsible for reporting your profits by completing a self-assessment tax return and paying income tax as well as national insurance contributions to HMRC.
As a sole trader, you and the business are a single entity; therefore, if the business owes money to its creditors, your home, car and other personal assets can be used to settle any outstanding debts.
Operating through a limited company as a content creator
Unlike a sole trader, once the business has been incorporated, a limited company obtains a legal entity separate from its owners (shareholders) and directors. As a result, content creators who operate through a limited company have their personal assets and finances protected – in case things ever went wrong.
Companies must pay corporation tax on their profits. As a shareholder and director of your own limited company, there are various ways to pay yourself; and therefore, more opportunities for tax savings. Additionally, limited companies are viewed as being more prestigious than non-incorporated businesses, resulting in more authority when discussing deals with potential brand partners and investors.
On the downside, the incorporation process of forming a company is more time consuming and costly than becoming a sole trader. Furthermore, the ongoing compliance with the rules and regulations of running a limited company involves regular admin and additional costs. Companies must file annual accounts to HMRC and Companies House, along with a separate company tax return and an annual confirmation statement.
Despite the additional resources required to run a limited company, the advantages of protecting your personal belongings, better tax savings and enhanced credibility make them an attractive structure for content creators with long-term aspirations.
What are the benefits for content creators who want to setup a limited company?
If your online platforms are growing and you are making large profits from your content, then you should be considering setting up a limited company.
- Reduce your tax liability
A limited company pays corporation tax between 19% and 26.5% on its profits. This is a lot lower than the 40% income tax you would pay as a sole trader when your earnings reach over £50K per year. Furthermore, companies do not pay national insurance contributions on their profits, unlike sole traders. Consequently, limited companies get to keep more of what they earn through these lower tax rates.
- Lower personal risk
Operating through a company provides your personal assets with protection if your company faces financial or legal challenges.
- Greater flexibility
As the company director, you can decide how much to pay yourself (i.e. through a salary and/or dividends). If your only source of income is from the limited company, you can pay yourself a salary up to the personal allowance of £12,570 – saving up to £3,330 in corporation tax!
You can then withdraw funds from the company’s accumulated net profits (dividends). Dividends are declared on your self-assessment tax return and taxed at much lower rates than traditional income tax (8.75%, 33.75% and 39.35%) vs (20%, 40% and 45%).
- Better opportunities
With a prestige business status, your company will obtain better credibility which could be the difference between a brand closing a deal with you or someone else.
When is the right time for a content creator to setup a limited company?
As mentioned above, if you are a sole trader earning over £50K per year, you will fall within the higher rate tax band of 40%! However, if you setup a company, the business would pay corporation tax instead – between 19% and 26.5%.
While you can register as a limited company from day one, it is something that you should consider if you are currently a sole trader, and your annual profit is £50K or more. Typically, the more profit you make, the greater the risk. When you are a sole trader, you and the business are the same entity so if the worst happened, and the business was in debt, then you would be personally liable.
How can a content creator setup a limited company?
In order to determine if a limited company structure is the best option for you and your business, you should seek professional advice. Engaging with an accountant may seem like an undesirable cost, but it will save you time and money in the long run by getting it right the first time.
As your accountants and trusted advisors, we can guide you through the process and incorporate your limited company on your behalf.
Can a self-employed content creator claim back expenses?
Absolutely! You can claim tax relief on business related expenditure. We recommend setting up a separate business bank account and record expenses using accounting software (such as Xero) to make the self-assessment process as smooth as possible.
It is wise to seek advice from an accountant, as there are several grey areas surrounding business expenses for content creators and HMRC has a strict definition of allowable expenditure.
Do content creators need an accountant?
Having a good accountant is an investment more than it is a cost. An accountant will help you save money by reducing your tax bill and take administrative tasks, such as bookkeeping and tax returns, off your hands so you can focus on content creation and growing your business.
As accountants for content creators, Taxsure can help you navigate the legal responsibilities and administration of running a successful content creation business. We provide our content creator clients with valuable advice which helps them take their business to the next level of success and beyond.
In conclusion
Content creators who earn a regular high income from their social media channels and content creation should consider establishing a limited company. It is vital to seek professional advice from an accountant like Taxsure before making any decisions. Feel free to get in touch with one of our expert content creator accountants today.