The dreaded tax issues. Being self-employed means paying your own tax and national insurance contributions, which can seem like yet another thing to think about. You will be required to keep organised and detailed financial documentation, enabling you to fill in annual Self Assessment tax returns. It’s a legal requirement, as invoices for sales and purchases, business receipts and bank records must be kept as testament to your Self Assessment. It’s not fun, it’s not pretty, but it’s essential.
HM Revenue & Customs
Registering with HM Revenue & Customs as self-employed is vital, as failure to do so can result in penalties, which certainly isn’t ideal for a fledgling business! This can be done online, registering for business taxes, with supporting documents such as Self Assessment, National Insurance, and if you’re employing people, PAYE. You will subsequently be sent a Self Assessment tax return, which you’ll need to complete on an annual basis, recording all of your income, which is used to determine how much Income Tax you are required to pay. National Insurance contributions are divided into Class 2 and Class 4. Class 4 contributions only need to be paid if your profits fall between £7,605-£42,475, which wouldn’t necessarily be a bad thing! It is essential that you are prepared to acknowledge that the money you will receive will be gross pay – not all of this is yours. You will be responsible for recording which percentage of income will be your net pay, and what percentage belongs to the infamous taxman.
If you are simultaneously employed and self-employed, you may be required to pay tax on both jobs, with Income Tax and National Insurance contributions needing to be paid separately. Working as an employee, Income Tax and National Insurance contributions will be deducted from your wages through PAYE (Pay As You Earn). When, as mentioned, filling in your Self Assessment for your self-employed earnings, it is key that you inform HM Revenue & Customs about any income you may receive from employment, along with the tax deducted from it.
If you are planning to start a limited company, you will need to register with Companies House, as this is a prerequisite for a business to become a limited company. Following this, your correspondence with HM Revenue & Customs will remain much the same as above.
Various expenses incurred by being self-employed or starting a business can be offset against tax. Supplies, equipment, accommodation, transport, and occasionally utilities, can be included on your Self Assessment to lower your tax contribution. You may also be eligible for tax exemption, meaning you can earn £8,105 annually without having to pay tax on it.
When starting a business or becoming self-employed, it is important to familiarise yourself with the tax issues surrounding your sector, to avoid incurring fines or overpayment. Contacting your local tax office can help clarify important issues, to ensure the tax-man doesn’t come a-knocking somewhere down the line. I know, I know, it sounds taxing. But familiarity with your tax contributions can contribute to the smooth running of your business.