Self employed

 

Becoming self employed

If you are setting up or buying a business on your own without a partner, operating as a sole trader on a self employed basis is the most simplest way to get started. If you are trading as a partnership, you will also be treated as self employed and taxed in the same way.

All your profits or losses from your self employment become your income and will be subject to income tax and Class 4 National Insurance Contributions (NICs). You must also pay Class 2 NICs at a flat rate and potentially capital gains tax if you make a profit on any capital assets of the business.

It is up to you to decide if the work you are doing is on a self employed basis, but it remains the responsibility of the person who you work for to decide if you are actually working for them on a self employed basis. You can be self employed and work as an employee for somebody else all at the same time, the only difference being that you are taxed through the PAYE system as an employee and through the self assessment regime as a self employed person. Please see our 'Tests for self employment' page in our payroll resources section for further details on determining self employment status.

Getting started

There are a number of things you must do when setting up as self employed otherwise you may incur financial penalties. Below are just a few of the most important tasks:

  • Notify HMRC as soon as you start in business and register as self employed
  • Register the partnership with HMRC if applicable
  • Choose your accounting period end date
  • Start keeping records of your income and expenses
  • Start putting money aside to pay your future tax bill on any profits
  • Register for VAT if it is advantageous or if your taxable supplies will exceed the threshold
  • Register as an employer for PAYE if necessary

You might also need to register for the Construction Industry Scheme (CIS) if you work in this sector.

Self assessment tax returns

As a self employed individual, you must complete and file a self assessment tax return no later than 31 January (if filed online) or 31 October (for paper returns), following the end of the tax year in which your income or losses arose. For example, if your annual accounting date is 31 March 2017, you must file your tax return no later than 31 January 2018 (if filed online) or 31 October 2017 (for paper returns).

Paying tax and NICs

Newly self employed individuals often find the method and timing of payments of income tax and NICs a little complicated and difficult to follow. It is not helped by the fact that in your first year of trading you do not pay any tax until after you have submitted you first tax return. By this point, you might have to make an additional payment for the expected tax liability of the next tax year.

We can help ensure you fully understand exactly when and how much you need to pay and send you useful reminders to help avoid penalties and interest on late payments being levied. We can also help you plan how much to set aside to pay your future tax liabilities.

Self employed individuals pay tax and NICs in two instalments. These are called 'payments on account' and are due on 31 January and 31 July each year (except in your first year of trading). Each of these interim payments will be based on one half of the total liability for the previous tax year. However, you do have the right to reduce payments on account if you believe your income tax for the following tax year will be lower.

A balancing payment or refund is then due on 31 January each year, along with the first payment on account for the current tax year. Class 2 NICs are also due at the same time.

For more information about how self employed people are taxed, see the following page: Taxation of businesses - self employed

Tax rates and allowances

Please see the following links for tax rates and allowances for the current tax year:

> Income tax rates and allowances

> National Insurance Contributions

> Capital gains tax rates

 

Disclaimer

This information is not meant as a substitute for professional advice and by no means covers every scenario. Almost every rule described here will be subject to many exceptions and caveats. Tax legislation is extremely complex and can be difficult to understand. You should discuss your circumstances with a qualified professional before acting on any information contained within this website. Tax legislation is constantly changing and the information contained within this website is written from our current understanding and interpretation of the tax system as of 6 April 2018.

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