Registering as self-employed with HMRC can be necessary for some to ensure they are paying income tax. It is an individual’s responsibility to settle their tax liability and there are two ways to do so. The first is through a pay as you earn (PAYE) scheme and this is available to those who are employed with an employer. Paying tax through PAYE means income tax, national insurance (NI), pension contributions, student loan repayments and other applicable deductions are taken directly at source from the employer as opposed to from the employee after they have received their wages. However, those who are self-employed are required to pay tax through a self-assessment tax return and will need to register as self-employed to do so.
What does self-employed mean?
To be self-employed simply describes your employment status. It means that you are not employed but rather working for yourself to generate an income. To HMRC there will be certain indicators which demonstrate you are self-employed such as:
- You run your own business and are solely responsible for the success or failure of it
- You’re able to choose who your customers or clients are and can have several of them at the same time
- You decide how, where and when you do your work
- You are able to employ other people and pay them yourself
- You have to provide your own equipment necessary to complete your work
- You are responsible for fixing problems or dealing with unsatisfied customers/clients even if that means working in your own time
- You can decide how much you want to charge for your products or services
- You sell goods or services to make a profit
If you’re still unsure as to whether or not you should be considered as self-employed then you can use HMRC’s online tool by completing a few questions.
Is there a difference between being self-employed and a sole trader?
Although the terms ‘self-employed’ and ‘sole trader’ are often used interchangeably, there is a distinct difference in meaning. To describe someone as self-employed is to refer to their employment status, whereas to describe someone as a sole trader means to depict someone by their business structure. However, it is possible for a person to be both employed and self-employed where they possibly have employment Monday to Friday but have a separate job on the side in which they are self-employed.
Other business structures which may seem to fall under the definition of being self-employed are partners in limited partnerships or directors in limited companies. Similar to sole traders, you are running your own business and are solely responsible for generating your own income; however for tax purposes and to HMRC, you are not considered to be self-employed.
How do I register as self-employed?
Registering as a sole trader is a straightforward process. Firstly, go online to the government portal and register for self-assessment and Class 2 NI. This will require entering personal information such as your contact details. Once this is done, HMRC will issue you with a Unique Tax Reference (UTR) number by post. It can take up to 10 working days or 21 working days if you live abroad.
Secondly, once you have done this and have received your letter with UTR, you will find there is also an activation code on the same letter. You need to go back online to the government portal and use this activation code the first time you log into your account. This step is necessary to complete your registration for self-assessment and once done you will be able to complete your self-assessment tax return online.
If you have previously submitted a self-assessment tax return online but not because you were self-employed, you will have to re-register using your existing 10-digit UTR number. Or if you have previously been completing your self-assessment tax return by paper, but also not for self-employment reasons, you can now re-register online.
Alternatively, there is a form you can complete online and then print out to send to HMRC.
When do I need to register as self-employed?
You should register as self-employed at the earliest opportunity once you start trading and meet the criteria of a sole trader. However, if things get in the way and delay this, there is a fixed deadline. You must legally register by 5th October of your business’ second tax year. For example, if you started trading in June 2020, you must register as a sole trader with HMRC by 5th October 2021 otherwise you run the risk of receiving heavy fines.
What do I need to do if I’m self-employed?
Once you have registered as self-employed, you may want to consider a name for your business. Your trading name can be your own name, or another name you wish to use, and you do not have to register this name with Companies House – unlike if you were to set up your business as a limited company. However, there are some rules and a sole trader’s name must not:
- Include the terms ‘limited’, ‘Ltd’, ‘limited liability partnership’ ‘LLP’, ‘Public limited company’ or ‘plc’
- Be offensive
- Be the same as an existing trademark
Some sole traders would like to protect the status and reputation of their trading name and so set up dormant companies. You can find out more about how to do this and how it can help in our article here.
When you begin trading as a self-employed sole trader you will need to take on responsibilities that an employer would take on for the business and their employees. You will need to:
- Keep accurate records of your business sales and expenses
- Complete a self-assessment tax return every year
- Pay income tax on your profits as well as Class 2 and Class 4 NI
Where your business reaches a turnover of £85,000 or more you must register for VAT. You can register for VAT voluntarily even where you do not meet this threshold if it would suit your business. You can find out more about how voluntary VAT may be useful here.
Do I need to tell HMRC if I stop being self-employed?
There may come a time where you decide to cease trading as a sole trader. Maybe you are retiring; or the business has grown to a point where you decide to register it as a limited company; or you may decide to become an employee for a business instead. Whatever the reasons, when you stop being self-employed, it is important that you inform HMRC.
To tell HMRC you are no longer self-employed you will need to complete this form on the government website. You will also have to complete a final self-assessment tax return and at this point may be eligible to claim certain tax reliefs such as Entrepreneurs’ Relief, overlap relief and terminal loss relief depending on your situation.
When you stop trading, you must also cancel your VAT registration if applicable, as well as close your PAYE scheme if you have any other employees. As a sole trader, you are personally liable for your business’ debts meaning you must settle any outstanding payments you owe your creditors. If you fail to do so, your creditors can take you to court and make you bankrupt if you fail to pay.
What to do if I need help when I’m self-employed?
Whether you are just about to become self-employed and would like guidance on your new employment status, or you are already self-employed and require help to complete your tax obligations, you can speak to our chartered accountants for expert help. Get started with a free introductory consultation by calling 01865 24 55 11 to book and we’ll be able to discuss the range of services which may be suitable.
For help completing your self-assessment tax return, you can find out more here.