Whether you're a sole trader or a limited or public company, if you are self-employed you need to be an on the ball person. Juggling jobs and organising your own finances and tax payments can be more stressful and time consuming than you imagine, and it certainly isn't for everyone.
Below are some UK based guidelines to give you an idea of what's required if you want to set up your own business. But tax is a complex area, so you should always seek professional advice before you begin trading.
Running a business
As a self-employed person, you will receive gross earnings from your customers on which you pay tax through a self-assessment tax return. You must complete your tax return each year, doing so as promptly as possible so that you can begin to plan for your tax payments. It is essential that you keep proper records of all your business income and expenses, including copies of invoices to customers and receipts for purchases (especially if you are VAT registered). A bookkeeping software package is good for this, but a simple ledger will be fine. And although not essential, it might be an idea to hold a separate business bank account to keep your business affairs apart from your personal finances.
Inland Revenue, Customs and Excise and VAT
You must tell the Inland Revenue (IR) that you are trading within three months of starting the business or else you will be liable for a penalty. If your turnover exceeds £83,000 in any 12-month period, you must register for VAT, informing Customs and Excise within 30 days of your turnover reaching this level. You can also register for VAT if you have a smaller turnover, and this allows you to reclaim the VAT element of all of your costs. Unlike income tax, VAT relates to single transactions so the VAT invoice or receipt must be kept for every transaction related to the business.
National Insurance
You pay National Insurance contributions to qualify for certain benefits including the State Pension.
You pay National Insurance if you're 16 or over and either:
- an employee earning above £157 a week
- self-employed and making a profit of £6,025 or more a year
You need a National Insurance number before you can start paying National Insurance contributions.
If you earn between £113 and £157 a week, your contributions are treated as having been paid to protect your National Insurance record.
Limited company
Trading as a limited company gives you a measure of protection against commercial creditors. As a sole trader or partner, you are fully liable for any business debts and may be made bankrupt if the business fails. If you are a limited company, however, you are usually only liable for debts to the extent of your share capital in the company, except in cases of fraudulent trading.
Pay your Self Assessment tax bill
The deadlines for paying your tax bill are:
- 31 January - for any tax you owe for the previous tax year (known as a balancing payment) and your first payment on account
- 31 July for your second payment on account
If you prefer to pay regularly throughout the year, you can use a budget payment plan.
You can get help if you can't pay your tax bill on time.
Ways to pay. Make sure you pay HM Revenue and Customs (HMRC) by the deadline. You'll be charged interest and may have to pay a penalty if your payment is late. The time you need to allow depends on how you pay.
Tax investigation
The self-assessment tax procedure is accompanied by random tax audits to monitor the system. The Inland Revenue can investigate your business affairs at any time and without reason. In fact, it conducts 750,000 investigations each year, about 8.5% of all tax returns, which means that anyone may find himself being investigated without knowing why or what the IR is looking for.
If handled correctly, an investigation may not be so daunting. Remember three important tips:
Keep accurate records. Records are the evidential backbone of your business. The more accurate and detailed they are the stronger your case.
Deal with enquiries promptly and efficiently. From your first response to an inspector's query, he will be building up a picture not only of your business but how responsibly you take your tax affairs.
Negotiation. An inspector has the power to negotiate on penalties and will take into account factors such as how you help with the enquiry and what course of action you offer to put matters right.
Employment status
Although there are no definitive rules as to a person's employment status in the UK, the distinction is usually whether you are working under a contract of service (employment) or a contract for services (self-employment). The IR will usually look at the following factors.
You are employed if:
You yourself do the work rather than hire someone else to do it for you
Someone can tell you at any time what to do or when and how to do it
You work at the premises of the person you work for or at a place he/she decides
You are paid by the hour, week or month and often for overtime
You work set hours or a given number of hours a week or month
You are self-employed if:
You have the final say in how the business is run
You risk your own money in the business
You are responsible for meeting the losses as well as taking the profits
You provide the main items of equipment you need to do your job, not just the small tools many employees provide for themselves
You are free to hire other people on your own terms to do the work you have taken on and you pay them out of your own pocket
You have to correct unsatisfactory work in your own time and at your own expense
Occasional earnings
Do not confuse occasional income with seasonal income, which is always classed as self-employment. Occasional or intermittent earnings may not be classed as self-employment, but each case will be taken on its own merits. Occasional earnings must be disclosed on a self-assessment tax return and tax paid at the normal time.
Find out more
The people who deal with your tax payments are not the enemy you might think they are. In fact, of all the customer service personnel you will ever deal with, they rank among the friendliest and most efficient.
- For Inland Revenue, visit
https://www.gov.uk/government/organisations/hm-revenue-customs
- For Customs and Excise, visit
https://www.gov.uk/government/organisations/hm-revenue-customs
- For details about Record keeping and simpler Income Tax applications/software, go to
https://www.gov.uk/government/collections/record-keeping-and-simpler-income-tax-applicationssoftware
- For information about employment status, go to
https://www.gov.uk/guidance/check-employment-status-for-tax