The Basics of Self Employment

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Becoming self employed is the quickest and easiest way to get your business up and running. However, there are a number of different structures under which you can operate a business so you should take professional advice before making a decision. It’s important to get it right and there are a number of aspects to consider.

What is Self Employment?
This means that you’re working for yourself, although you may also have people working for you. You’ll pay income tax on your taxable profits, through Self Assessment. You will also pay Class 2 and Class 4 National Insurance through Self Assessment. It is important to realise that you are responsible for paying your own income tax and national insurance, unlike when you are employed and work for somebody else. The law makes no distinction between you and the business which means that you are personally liable for any debts that the business may incur.

Registering as Self Employed
When you start working for yourself you need to advise HMRC straight away otherwise you may receive a financial penalty.

You can register online at www.hmrc.gov.uk.

Keeping Records
Once you’ve started your business it is essential to keep full and accurate records of your income and expenditure. It’s a legal requirement to do so. The amount of tax and national insurance you pay will be based on your business profits so you must keep good records of everything you sell and purchase. 

Paying Tax and National Insurance
You will pay income tax and Class 4 national insurance by completing a self assessment tax return every year. After the tax year ends on 5th April you will need to complete the tax return online. HMRC must receive your tax return by 31 January the following year when submitting online. If your tax return is late you will receive an automatic financial penalty of £100.

You also need to pay any tax due by 31 January. You will also need to make Payments on Account on 31 January and 31 July (see below).

The current rate for Class 2 national insurance contributions is £2.85 (2017-2018) a week. However, if your earnings are below £6,025 per year (2017-18) you might not need to pay. You can apply to HMRC for this exception using form CF10.

Class 2 National Insurance contributions give entitlement to a range of contributory benefits including Incapacity Benefit, Maternity Allowance, Basic State Pension or Bereavement Benefits.

If your taxable profits are above the lower Class 4 profit limit (£8,164 for 2017/18) you will pay Class 4 contributions of 9% on profits over this limit. You pay both Class 2 and Class 4 National Insurance with your income tax – usually due by 31 January and 31 July each tax year. If profits are high (over £45,000 in 2017/18) then the rate of Class 4 National Insurance falls to 2% on profits over this higher limit.

First Year of Self Employment
For the first year you are self employed, there could be a long delay before you pay any tax, but, when it arrives, the bill is likely to be large. This because if you start business on 6th April 2017 you will not need to pay the tax until 31 January 2019. It is important that you set aside funds to settle any potential tax bill during this period.

Payments on Accounts
After your first year in business you will normally have to make two tax payments each year – 31 January and 31 July. If your annual tax bill is £1,000 or less, you will have only one payment to make on 31 January each year.

These two tax payments will include “Payments on Account” which are advance payments of your income tax bill. These are estimated tax amounts of what your tax liability may be at the end of the tax year and the amounts you pay are based on the previous years profits. Once the final tax liability is known at the end of the tax year you may have paid too much (or too little) income tax in advance and a balancing payment (or refund) may be required.

You will receive regular statements of your account from HMRC once your tax return has been submitted and these statements will tell you how much tax you owe and how much you have paid.

Personal Drawings
When you work for yourself, you will pay yourself what is known as “drawings”. This is any money that you withdraw from your business for private purposes, such as to pay your  personal bills and living expenses. You do not pay tax on these drawings. You will pay tax on the profits of the business at the end of the tax year i.e. income less expenses.

Other things to consider
Depending on your trade, you may need a licence to run your business and you must have adequate insurance for the business. If you have employees, you must have employers liability insurance.

If you own or rent premises, you must ensure that these comply with regulations. If your business is based at home, you need to consider whether your title deeds, mortgage or tenancy agreement places any restrictions on this.

Further information
If you need further advice on self employment please telephone us on 01386 764741 or message us and we’ll be happy to help. You can also sign up for our free regular tax tips through our website www.accountancyoffice.co.uk.