Are you working for yourself but haven’t made things official yet? Or, are you in the process of setting up a business and are wondering whether you need to let HMRC know what you are doing? If you’ve decided to take the leap and be self-employed, it can initially be a daunting and complicated experience. In this guide, I’ll help you get to grips with the rules and legalities. Read on to find out when to register as self-employed, the deadlines you need to meet and how to do it.
Side Hustler? Taxes work slightly differently when you’re employed and self-employed. Read this guide to find out when to register your side hustle.
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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. When Should You Register as Self-Employed?
You are considered self-employed if you earn money by working for yourself or have set up a business to sell products or services. In most cases, the money paid to you is untaxed. That essentially means it’s paid to you without any tax deducted so it’s up to you to declare it.
You are legally required to register as self-employed once the money you get paid (not your profit) goes over £1,000 during a tax year. Below this amount, you can avoid letting HMRC know about your business and paying any tax. This tax-free amount is known as the trading income allowance but it isn’t always appropriate to use. Therefore, make sure you do your research before you claim it.
Regardless of whether you are making a profit or even need to pay any tax, you’ll need to let HMRC know that you are self-employed. This should be done by 5th October following the end of the tax year you first started your business. A tax year runs from 6 April to 5 April. So, for example, if you started your business on 1 January 2022, then you would need to let HMRC know by 5 October 2022.
Despite this deadline, I would advise you to register as self-employed as soon as possible because they prefer to know sooner rather than later. By doing this, you’ll also reduce the risk of receiving an automatic £100 penalty if you forget to do it.
2. Can You Run a Business Without Registering It?
Every sole trader needs to register for tax, whether they make a profit or not. That’s because HMRC wants to track what is happening with everyone’s earnings by using the process of self-assessment. So, you can start working for yourself and not worry about registering until your turnover exceeds £1,000. After that, you’ll need to register as self-employed.
If you are planning to operate through a Limited Company, you’ll need to register your business at Companies House. This is the first step you need to do before you can use the name and the letters LTD or Limited at the end of the name. You can also open a business bank account.
Not sure what legal structure is right for you? Read this guide: Sole Trader or Limited Company? Which Business Structure is Right for You?
3. How Much Can You Earn as Self-Employed Without Paying Tax?
You can earn £1,000 tax-free by utilising the trading income allowance during the tax year. Once your income goes over £1,000, you can then earn up to £12,570 in profit for the tax year 2021/2022 without paying tax because of the personal allowance – the amount that everyone in the UK is entitled to earn tax-free. Even if you have no tax to pay, you must still register as self-employed and let HMRC know about your earnings. Once your profits go over the tax-free amount, you’ll start to pay income tax as follows:
- 20% (basic rate) on profits between £12,570 to £50,270
- 40% (higher rate) on profits between £50,271 to £150,000
- 45% (additional rate) over £150,000
If you have other forms of income for example because you are employed and self-employed then you’ll pay income tax based on all your combined earnings – read this guide to find out more.
As a self-employed person, you’ll also pay National Insurance on your business profits, but again you won’t pay any if you earn up to the tax-free thresholds. Here are the National Insurance rates for the 2021/2022 tax year:
- Class 2 National Insurance £3.05 per week on profits over £6,515 per year
- Class 4 National Insurance. 9% on profits between £9,658 and £50,270 and 2% on profits thereafter
Despite not having to pay Class 2 National Insurance, some people choose to pay it voluntarily because it keeps their NI records up to date and protects their ability to claim state benefits like maternity allowance and the state pension.
Getting your head around when to register as self-employed doesn’t need to be overwhelming. Once you’re armed with the right knowledge, it can be a relatively easy to do.
- How to Register as Self Employed with HMRC
- Self-Employed Tax Explained
- Self Employed Expenses Explained
- Do You Need a Separate Business Bank Account If You’re Self-Employed?
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.
Updated 22 January 2022