Day 7 - Registering as Self-Employed

So Monday last week meant back to the day job. As an accountant January is our busiest time of the year so I was really lucky to be able to have the whole of Christmas and new year off.

Experience has shown me that HMRC has a tendency to make things appear much more complicated than they really have to be, and that if you need to contact them for anything you will need a spare hour – or two!

Registering your business for tax and national insurance is (honestly) a relative simple and pain free process. Although I know that the mere thought of it will bring some people out in hives!

This post will explain in simple steps exactly what you need to do (and when) to let HMRC know that you are Self Employed.

Am I Self-Employed?

This is often an area where most people get confused. One of the most common misconceptions is that you can’t be employed and self-employed – Yes you can – for example, if you work for an employer during the day and run your own business in the evenings.

If you’re trading, you’re self-employed.

You’re likely to be trading if you:
sell regularly to make a profit
make items to sell for profit
sell online, at car boot sales or through classified adverts on a regular basis
earn commission from selling goods for other people
are paid for a service you provide

Once you have established that you are Self-Employed, you must register and follow rules for self-employed tax and National Insurance.

To register as a self-employed sole trader, you’ll need to tell HM Revenue and Customs (HMRC) to make sure you pay the correct Income Tax and National Insurance through Self Assessment.
You will also need to keep records of your business income and outgoings, and pay your tax each year, usually in 2 payments on the 31 January and 31 July

You must also register for VAT if your business turnover is over £81,000.

So, How do i do this?

Visit the HMRC website (www.gov.uk/new-business-register-for-tax) and follow through the wizard, you will be asked to fill in a short form – name, address, national insurance number etc (nothing too taxing! – sorry – couldn’t resist!). You will also set up your access to the ‘Government Gateway’ at the same time. This is simply a log in to access your records with HMRC.

Once you have completed the form your registration will go through a series of checks, and HMRC will write to you with what you need to do next.

Now you need to think about national insurance. Self-employed individuals pay two types of national insurance – class 2, which is £2.75 per week – usually paid by direct debit, and class 4 which is calculated as part of your self assessment and is paid together with your tax.

BUT…. If you only pay National Insurance if your profits are above £5,885 and you’ll pay more when your profits rise above £7,956.

Annual profits	Class 2	Class 4
Up to £5,885	£0 but only if you get a small earnings exception	£0
£5,885.01 to £7,956	£2.75 a week	£0
£7,956.01 to £41,865	£2.75 a week	9% of profits between £7,956.01 and £41,865
More than £41,865	£2.75 a week	9% of profits between £7,956.01 and £41,865 and 2% over that amount

If you think your profits (sales less expenses) will be below £5,885 per year you can apply for a Small Earnings Exemption Certificate. Use form CF10 to apply for an exception from Class 2 National Insurance contributions.

So now you have registered for Self-Employment you will need to keep a list of all of your business related earnings and expenses as these will be needed to complete your tax return.

Your tax return is based on the dates 6th April – 5th April and must be submitted to HMRC by the 31st January following. For example, if you started trading on the 1st January 2015, your first tax return will cover the period 1st January 2015 to 5th April 2015, and must be with HMRC by 31st January 2016. This is also the date you will make your first payment of tax. So make sure that you put some money aside to cover this.

I am not going to go into detail here about how to record your expenses or how to work out what your tax payments are going to be, but if you do think that this is still all too confusing I would suggest speaking to a local accountant as they will be able to help ensure that you do not pay too much tax!