This is a question I get asked frequently from people who are not sure if they’re considered self-employed. For example, if you haven’t even started to turn a profit in your business, does that mean you’re considered self-employed? Maybe you earn a bit of cash from doing something you enjoy and why should HMRC even know about it? Or, you’re just testing out an idea to set up a business so why should you bother with all the paperwork?
If any of these questions have run through your head, then here is some advice to help you along the way. This guide lays out the basics of what self-employment is as well as what you need to do next.
Updated 12 January 2022
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Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
1. What is Self-Employment?
Put simply, self-employment is defined as a situation where you work for yourself or have set up a business. In both these situations, the money you get paid is most likely untaxed – that means it is paid to you without any tax deducted and it’s up to you to declare it.
So, when it comes to deciding whether you are considered self-employed or not, you need to look at what you are doing, not how much money you are making.
The only exception to this is if your business turnover or the amount you are paid before costs, is less than £1,000. In this instance, you can use the £1,000 trading income allowance to avoid letting HMRC know about your business and paying any tax.
2. Questions to Help You Decide if You’re Considered Self-Employed
Listed below are some of the questions you can ask yourself if you’re trying to decide whether you’re considered self-employed or not. Although this list isn’t exhaustive, if you answer yes to any of these, then most likely you are self-employed:
- Are you responsible for finding your own work and making sales?
- Do you need to buy your own equipment to deliver a job such as a computer, mobile phone or equipment?
- Have you set up a website or social media account to market your services?
- Do you have the ability to hire someone to do the work or job you have won?
- Can you decide whether or not to accept a job?
- Are you responsible for the success or failure of a job?
- Do you work for a number of people rather than just one company?
- Are you entitled to employment rights, to receive sick pay or holiday pay?
- Have you arranged your own pension?
- Do you earn more than £1,000 of untaxed income through your business?
- Do you fund the cost of delivering work before your customer pays you?
- Are you getting paid income from your clients and customers with no tax deducted from it, but is taxable?
You are probably not self-employed by someone if you:
- Receive a payslip from your employer and they pay your tax deductions over to HMRC on your behalf;
- Don’t carry any risk when it comes to the success or failure of the business you work for;
- Have employment rights;
- Are entitled to receive sick pay and holiday pay;
- Have an employment contract and set working hours;
- Are not considered a business owner;
- Get told what work you need to do, how and when by;
- Have a line manager.
Penny is a yoga teacher. She has to search for her own students, has set up her own classes and rented a space in a local gym. She has to pay the gym rental whether her classes are full or not; take out insurance; and advertise the class herself. Penny is, therefore, a self-employed yoga teacher because she isn’t employed by the gym.
Carlos is a website designer. He is contracted to work in an office 4 days a week where he is given work to do by his manager who checks the quality of each website he designs. Carlos is employed by the business he works for and should expect to receive a payslip with tax deducted in accordance with his tax code.
3. How to Declare Taxable Income
When you’re employed by someone, they give you a payslip which includes all the necessary deductions, such as income tax and National Insurance. This is worked out for you on your behalf by your employer (this is known as PAYE).
However, if you are, for example, an Esty seller, every time you make a sale the money you receive has no tax deducted from it. You must pay income tax and National Insurance on your earnings so it’s up to you to let HMRC know you are receiving untaxed income. You also need to inform them – using a self-assessment tax return – about your income and paying any additional tax due.
If you are considered self-employed, then you’ll need to pay income tax and National Insurance (Class 2 and Class 4) on your business profits. Although the amount you’ll pay depends on the amount you make, and you can find out how self-employment taxes work, with examples, in this guide.
4. What to Do If Your Are Unsure If You’re Considered Self-Employed
If you aren’t sure what your employment status is, start by going to the HMRC website where you can get help deciding using their free tool which checks your employment status for tax. You can also speak to the person you are working for, if you feel comfortable doing so, to try and confirm your tax status. This will help you make an informed decision as to whether you’re considered self-employed.
5. Can You Be Employed and Self-Employed?
Yes! And in fact, many people choose to be employed and self-employed for many reasons:
- They need to earn a steady income while they go self-employed on the side;
- As a way to earn extra money to invest in their business;
- To earn money on the side of their full-time job as a way to make some extra cash;
- They are in the early days of self-employment and take on an employed role while building their own client base.
I’ve written a separate guide with more details covering the tax implications of being employed and self-employed because there are some things you need to watch out for.
6. What Happens if You’re Considered Self-Employed
If you decide you are considered self-employed, then you’ll need to register as self-employed and follow the rules of self-assessment. This includes tracking your income and expenses, filling in a tax return and paying tax on your earnings. You can read more about what you need to do in my beginners guide to going self-employed. It contains more information on registration, bank accounts and reporting your earnings along with other useful stuff you need to know as you embark on your journey to be your own boss.
- The Trading Income Allowance Explained
- How to Register as Self Employed with HMRC
- HMRC Self Assessment Explained
- How to Claim Self Employed Expenses
Taxes are changing! From April 2024 sole traders will need to report their earnings and pay tax on a quarterly basis. This is known as Making Tax Digital, which you can read more about in this guide to help you get prepared.