When you’re outside looking in, self-employment seems like a delicious fantasy. Imagine: flexible hours, higher income potential, independence. So, you take that step and join the ranks of the 4.8 million other Brits who serve no master.
But you will have to register with HMRC. And that’s when it hits you – you’re on your own.
The responsibilities begin to weigh down on you. You need to find work, decipher expenses, catalogue cash flow, and of course, file your own taxes. And, oh god, what about job security, paid holiday, sick pay and…
Don’t worry - we’re here to help
You’ve seen the charms inherent in the life of a sole trader, but now it’s time to contend with the challenges. Registering with HM Revenue and Customs (HMRC) as self-employed is the first step.
When do you tell HMRC?
The moment you begin working for yourself, HMRC considers you self-employed, or a sole trader. HMRC considers your business’s active start date to be the earliest of:
- when you begin to market your business
- when you have goods or services to sell and a customer base.
Make sure you register as soon as possible. Failure to do so within 3 months of starting your enterprise will earn you a £100 late fee. If you continue to delay, your penalty could swell to as much as £1,600.
How do I tell HMRC that I’m self-employed?
There are three ways to inform HMRC that you’re becoming a sole trader. These are:
- Register online.
- Fill out the CWF1 form and register by post.
- Call the newly self-employed helpline at 0300 200 3504.
What will it entail?
When registering yourself as self-employed with HMRC, you’ll be asked to provide personal and business information, which they will use to establish your tax records. You’ll also be registering for their online services simultaneously - these allow you to send your tax forms online.
Registering as self-employed with HMRC means that you’re registering for both Self Assessment tax returns and Class 2 National Insurance.
Benefits of registering
You’ll avoid hefty fines, for a start.
Registering as self-employed with HMRC automatically sets up your online account, which you can view at any time. This enables you to send tax returns online, check payment due dates, and register for other business taxes such as Value Added Tax (VAT) if your annual turnover exceeds a certain amount (currently £85,000).
HMRC will also give you with a Unique Taxpayer Reference (UTR) number. This ten-digit number is used to get in touch with HMRC and access your Government Gateway account.
Remember that self-employment means you’re responsible for filling out your own National Insurance Contributions (NICs) along with your tax returns. There are two main types of NICs that you might have to pay – Class 2 and Class 4.
Class 2 NICs are compulsory, and due from the day your self-employment begins. Paying into your Class 2 NICs counts towards benefits such as the basic state pension, employment and support allowance, and maternity allowance fund.
Your class 2 NIC can be paid in weekly, monthly, or biannually in January and July. You can pay this fee:
- By Direct Debit
- By Online or telephone banking
- At your bank or building society
- At the Post Office
- By cheque through the post.
You may be exempt from Class 2 NIC payments if:
- You’re under 16 years old or at state pension age
- You’re a married woman or widow with a Certificate of Reduced Rate Election
- You have a Certificate of Small Earnings Exception if your earnings are below a certain amount, which varies year by year.
Class 4 NICs are based on your profits for the fiscal year. They are:
- Compulsory if your earnings are above a certain amount (currently £8,424)
- Not calculated on a flat rate, but based on a percentage of your taxable profits. This is changeable year by year
- Automatically calculated when paying online.
A painless process
All of this stresses the importance of registering with HMRC. However, save for items like expense reports, that’s pretty much the extent of your paperwork. There are no company formation costs to worry about, and your first step into the world of self-employment is complete once you’ve registered with HMRC. It’s actually quite simple.
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