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If you are ready to go self-employed, it’ll help to get to grips with some of the basics of self-employment, including definitions, responsibilities and taxes.
What is Self-Employment
Being self-employed means you work for yourself and are responsible for working out your taxes.
It’s the opposite to when you are employed by a Company and receive a payslip, where your employer’s responsible for working out your taxes and paying it to HMRC on your behalf.
Generally speaking someone works for themselves if they are:
- Are responsible for finding their own work and making sales;
- Have to buy their own equipment to deliver a job such as a computer, mobile phone or machinery;
- Can hire someone to do the work or job they have won;
- Can decide whether they accept a job or not;
- Responsible for the success or failure of a job;
- Work for a number of people rather than just one person;
- Are not entitled to Employment Rights like receiving sick pay or holiday pay;
- Have to arrange their own pension;
- Earn more than £1,000 of untaxed income.
Who Needs to Register as Self-Employed
Anyone who earns more than £1,000 of untaxed income needs to register as self-employed.
That means if you earn a bit of money through eBay or Etsy for example, you don’t need to register. This is known as the HMRC Trading Allowance and means you avoid having to let HMRC know about your income or filling out a tax return. Just make sure you keep proper records of your income to prove you earned less than £1,000.
What are the Benefits of being Self-Employed
There are so many benefits to being self employed, here are the main ones:
- No boss to answer to;
- Set your own working hours;
- Choose your own work and workload;
- Can opt to work longer hours to earn more money;
- Do things YOUR way;
- Pay less tax than if you are employed (more on that later).
- Doesn’t affect your entitlement to Working Tax Credits and Tax Free Childcare.
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 start their own business on the side;
- As a way to earn money to invest into their business;
- To earn money on the side of their full time job to provide some extra cash;
- They are in the early days of self employment and take on an employed role while building their own client base.
A Summary of Your HMRC Responsibilities
When you go self-employed you are responsible for:
- Telling HMRC that you are self-employed and receive untaxed income;
- Paying Income Tax and Class 2 and Class 4 National Insurance on your profits by 31 January and 31 July each year;
- Completing a Self-Assessment Tax Return online by 31 January each year and paying any tax due.
When to Tell HMRC that you are Self-Employed
You must let HMRC know that you are self-employed by the
A tax year runs from 6 April to 5 April.
So if you started working for yourself on 1 January 2018 then you would need to let HMRC know by 5 October 2018.
Tax and National Insurance When You’re Self-Employed
When you’re self-employed you must pay:
- Income tax
- Class 2 National Insurance
- Class 4 National Insurance
The amount of each you pay is based on the amount of profit you make (that means all your income less allowable business expenses).
This means that many self-employed people benefit from lower tax bills than those who are employed.
Read about how to calculate tax and national insurance when you’re self-employed here and download my free tax calculator
It is your responsibility to calculate your own taxes and submit a tax return form online. You can choose to use an accountant or you can do it yourself.
Anita is a Chartered Accountant with over a decade of experience taking self-employed business owners from financially confused to business savvy.
She is the creator of the ‘Go Self Employed’ website, which is her corner on the internet where she makes self-employment less terrifying.