Self-employment can be an exciting thing, promising independence, flexibility, and the fulfilment of being your own boss.
However, this venture is not without its complexities. There are legalities and financial regulations which you should be aware of before becoming self-employed.
When is somebody classed as self-employed?
The first thing to understand is what it means to be ‘self-employed’.
HM Revenue & Customs (HMRC) considers you to be self-employed if you own a business, if you have several customers at the same time, and if you oversee how, when and where you do your work.
If you’re a sole trader, are in a business partnership, or have your own limited company, then you are also classed as self-employed.
Registering with HMRC
When you become self-employed, it’s essential that you register with HMRC.
This informs them of your self-employed status, after which you will need to complete an annual Self-Assessment tax return.
Failing to register could lead to penalties, so it’s important to do this as soon as possible.
Understanding and managing tax responsibilities
In the UK, self-employed individuals are responsible for paying their own taxes and National Insurance Contributions (NICs) through Self-Assessment.
However, understanding these obligations can be confusing. You’ll need to keep track of your business income and expenses throughout the year, as they will determine your trading profit and subsequently, the amount you are taxed.
It’s also essential to keep track of tax deadlines. The fiscal year runs from 6 April one year to 5 April the next, and you usually have until 31 January the following year to file a tax return and pay any tax due – although many taxpayers rely on Payment on Account that allows them to make two payments of tax within the following year.
You must register for VAT if your taxable annual turnover exceeds the VAT threshold for any consecutive 12-month period.
The threshold currently stands at £85,000 for 2023, but it is important to keep track of this, as the cost can vary from year to year.
If you exceed the threshold, then you’ll need to add VAT to your prices, the amount varying on the goods you are selling. The standard rate is 20 per cent for most things, with the reduced rate of five per cent being on goods such as sanitary hygiene products and energy-saving materials.
You can then reclaim any VAT you’ve paid on business-related goods or services back from HMRC.
Depending on your line of work, you may need to consider taking out insurance. There are different types depending on what you need them for.
Professional indemnity insurance covers you if a client claims that your work has caused them a financial loss.
Public liability insurance protects against claims for damage to property or injury to a third party. If you employ others, employers’ liability insurance is mandatory.
As a self-employed individual, you are responsible for your own pension.
The State Pension is a good starting point, but you might want to consider setting up a personal pension or a self-invested personal pension (SIPP) for additional financial security in your later years.
For more information about pensions, tax, VAT, or other business finance queries, please contact us today.