Looking to become your own boss or start a part-time business? Ensure you stay within the law with our guide to the essential steps for registering as self-employed.
It’s easy to get caught up in the excitement of starting your own business or earning extra cash from part-time work, but it’s essential to tell HM Revenue & Customs (HMRC) about your self-employment as soon as possible. Telling HMRC means you can be sure you’re paying the right amount of income tax and National Insurance, and registering as self-employed is quick, easy and costs nothing. But don’t delay – you must tell HMRC within three months of starting to trade or you could be breaking the law and face a penalty of £100.
Why should I register as self employed?
If you’re employed deductions for income tax and National Insurance are handled by your employer. They are automatically deducted from your PAYE salary by your employer, leaving you the remainder in your weekly or monthly pay.
However once self-employed you become responsible for calculating and paying tax and National insurance on the profits your business makes. This is done through a process called self-assessment. This means you must fill in and submit a tax return for each tax year just ended, detailing your earnings and any other income, so that the correct amount of tax and National Insurance can be calculated. You’ll need to do this whether or not you’re employed in another job.
Even if you already submit a self-assessment tax return as an individual – for example to pay tax on rental income or to claim back tax on charitable donations – you must register with HMRC as soon as you become self-employed.
What counts as self-employed?
Knowing whether you’re self-employed might seem obvious, but in some cases your employment status is not always clear. HMRC has a useful video that explains the difference between being employed and self-employed, and the implications for tax:
If you receive payment from another person for services that you provide or for goods you sell which isn’t paid through a PAYE system then HMRC will consider you self-employed and therefore you’ll need to pay tax on the profits you make.
This applies to everything from selling homemade items such as cakes or jewellery to building websites and private tutoring. It doesn’t however include the occasional selling of unwanted personal items to make a little spare cash.
You can be both employed and self-employed at the same time too: for example by working for a company during the day and running your own business at night and at weekends.
If you’re not sure if you’re self-employed, use the HMRC Employment Status Indicator online tool to figure out your employment status based on your answers to a series of questions. It’s completely anonymous so you won’t need to provide any personal details, just information about the hours and nature of your work. Find the HMRC Employment Status Indicator here.
What’s the difference between registering as self employed and being PAYE?
PAYE (Pay As You Earn) means tax and National Insurance is deducted from your annual salary automatically. As you may already know, this depends on your tax code, which is worked out using your salary and the current tax threshold.
This is not the case when you’re self employed. Instead, you’ll be required to send HMRC a tax return and a payment before the end of each tax year.
On top of this, you may be required to pay VAT on all goods and services your company receives and provides, and you’ll also be expected to make your own National Insurance (NI) payments from now.
Don’t worry though. HMRC will explain everything in detail when you register as self employed and you’ll be sent all the forms and literature needed to help you work out your own situation.
When should I register as self employed?
HMRC recommend you register as self employed as soon as possible. However, you can register in your company’s second tax year up to October 5th.
When you register self employed, you are notifying HMRC of your intention to pay Class 2 National Insurance (currently profits more than £5,965 or more a year).
You then have 18 months to pay your Class 4 National Insurance, which is your tax calculated after 12 months of trading. However, you’ll only have to pay this if you make a profit.
How to register as self employed by phone
Wondering whom to contact to register as self employed?
There are numerous ways to register as self employed.
HMRC’s self employed helpline gives you the opportunity to register over the phone. Simply call 0844 453 0165 to get in touch with a representative.
Before making the call, it’s worth making a note of:
- National Insurance number
- Business trading name
- Business address
- Business phone number
- Past tax history
How to register as self employed online
The quickest way to register as self employed is online via the HMRC website.
You’ll be asked a few questions about:
- Your current tax status
- Current employment status
- Basic business information
Again, it’s worth making a note of all relatable documents including your National Insurance number, the size of your company, and your predicted earnings.
Once you’ve registered you’ll be sent a certificate to notify you of your change in employment status. You’ll also be sent additional forms from HMRC which you will be required to fill out and send back to them.
What happens after I’ve registered as self-employed?
Once you’re registered HMRC will write to you in April each year telling you to complete a tax return online or send a paper tax return to fill in for the tax year that has just ended. Filing your tax return online offers many advantages including a later submission deadline, automatic calculations of the tax you owe, and the chance to view and alter payments.
Filling in your tax return correctly is much easier if you keep good records of the money that comes into and goes out of your business. To work this out keep paper or electronic documents including bank statements, sales invoices, receipt for purchases, vehicle mileage records and cashbooks.
Gather and store these together as you work to avoid a stressful search for records running up to tax return submission deadlines. Paperwork must be kept for up to five years after your submitted tax return as HMRC may ask to see it. You can be fined for failing to keep records.
Do I need an accountant?
“Should I hire an accountant for my new business?” It’s a question we’re regularly asked at Start Up Loans.
If you’re not confident handling your own tax returns, or don’t have the time, it could be worth hiring an accountant. Not only will an accountant be able to handle your tax affairs, they’ll also be able to highlight useful tax breaks and can advise on NI, VAT and anything else related to your company’s finances.
Whether you choose to hire an accountant after registering self employed is your decision. Either way, it’s imperative that you keep a note of all receipts, invoices and transactions to keep track of your company’s finances.
If you decide to forgo an accountant and do it yourself, HMRC’s website provides lots of help. Alternatively speak to a HMRC advisor on 0300 200 3310.
When does my tax return need to be completed by?
If you’re self-employed there are strict tax deadlines that you must adhere to. It’s worth setting reminders on your phone or desktop calendar to avoid missing these deadlines and paying a penalty.
Paper self-assessment forms must be received by HMRC by midnight on 31st October following the tax year just ended. The deadline for completing the online form is three months later – midnight on 31st January and all the money you owe for that tax year must be paid by 31st January. This is automatically calculated for you to see when you file online. If you submit a paper form HMRC will calculate your tax liability and send you a bill – so allow plenty of time before the deadline.
How to register for VAT
It’s not just tax and National Insurance you’ll need to consider when becoming self employed. If you’re planning to register as self employed in the UK you’ll also need to think about registering for VAT.
Depending on how much your company turns over each year you’ll need to register for VAT and complete a return each quarter.
You can register online for VAT or via post through HMRC, who will explain everything you need to know about your eligibility to pay VAT.
If you’re still unsure, we offer free advice and mentoring to all of our Start Up Loans beneficiaries.
On being accepted for a loan, you’ll be assigned a dedicated business expert who will be able to talk you through the process.
What if I want to hire staff?
Being a sole trader doesn’t mean you have to work alone, you can employ staff to help you. However, as soon as you hire someone, you must inform HMRC. You will then have to collect tax and National Insurance contributions from your employees through a PAYE payroll scheme. We have lots of articles on staffing in our Business Advice if you’re thinking of taking on staff.