Tax and Self Employment Issues

If you are Self Employed, you’ll quickly either need to know how to assess your own tax at the end of each year, or hire an accountant! Even if you decide to pay someone else to complete the paperwork for you, you will need to provide them with the rudimentary figures in the first place and so it is essential you are aware of your legal obligations.

What is Self Employment?

If you’re running your own business, are financially liable for that business and not being paid a wage by anyone else, you will be classed as Self Employed. As such, you are responsible for your own tax and National Insurance contributions as well as knowing how the law affects your status as a worker.

Registering as Self Employed

When you begin working for yourself, you must tell the government’s Revenue & Customs department (HMRC) that you are doing so. This is called registering as Self Employed after which time you will receive a Self Assessment tax return to complete each fiscal year.

Self Employment and Benefits

Being Self Employed has knock-on implications for receiving benefits and it's wise to check how these may affect you.

For instance, certain statutory benefits and ‘rights’, such as Maternity Leave, Sickness Pay, Redundancy Pay, Unemployment Benefit and Pension schemes will all have to be thought about. These issues tend to be taken for granted when we’re employed by someone else, but you need to understand what happens when we employ ourselves.

Self Assessment

Each financial year – the end of which is 5th April – you will need to complete and submit a Self Assessment Tax form for HMRC. This tells them how much you’ve earned, and details your entire annual expenditure so they can calculate the tax you owe or are owed.

You can go on short courses to learn how to complete your tax forms, pay an accredited accountant to do so on your behalf (their expertise may often be able to save you money) or work with the HMRC direct themselves using their support service.

You will have a choice of whether to complete a hard paper copy of your tax forms, which should be sent to you automatically and send to the HMRC by post, or to complete the forms online. If you haven’t completed a self assessment return before, it is advisable to do so online because there are notes to help you as you go along which are very useful.

Value Added Tax

Value Added Tax is a tax on goods and services which is payable to the government, a proportion of which you may be able to claim back if your company is VAT-registered.

At some point on your self-employment journey, you will need to decide to register for VAT or if it is likely to earn above the allowable threshold, then it will be a legal requirement to do so.

If your business is VAT-registered, you will need to comply with specific regulations and separate off any VAT received on your invoices as payable to the government. This is then usually paid to the HMRC on a quarterly basis.

For VAT-registered companies, the accounting procedures become more complicated and it’s probably best to employ the skills of an accountant for end of year returns. For this reason, many smaller companies understandably decide to avoid it, at least until they become more confident of basic tax procedures, but there are many benefits associated with being registered which should not be over-looked. If in doubt, do seek professional advice.

National Insurance Contributions

National Insurance Contributions (NICs) are payments you make if you are over 16 and under retirement age and which contribute to your entitlement to receive social security benefits and a State Pension.

The amount you pay will depend on whether you are employed or self employed and how much you earn.

You can check the current NIC rates by looking at the HMRC website but at the time of writing, a Self Employed person will be expecting to pay ‘Class 2’ contributions at a weekly flat rate of £2.30 (which can be paid by Standing Order each month) plus an additional ‘Class 4’ rate which is worked out as a percentage of your taxable profit each year. You will be able to calculate this figure when doing your end of year tax return but for earnings less than £40,000 and over £5,500, it will be 8 % (figures rounded).

Whatever stage you’re at – thinking about becoming Self Employed or already half way through your first year of trading, don’t leave it too late to sort out your tax. Deadlines always seem to come at inconvenient times and tax deadlines are the sort you don’t want to miss!