Since the start of the economic downturn in 2008, the number of self-employed workers in the UK has risen by 367,000.The Office for National Statistics estimates 4.2 million people are now self-employed in their main job, representing 14% of the UK’s 29.4 million workers. The latest figures also suggest a further 304,000 have a second job in which they are self-employed.
Self-employed individuals are known as sole traders. This means you are running your own business and you will pay income tax on all profits you make. As a sole trader, you alone are responsible for the business but this doesn’t mean you have to work alone; many sole traders also take on staff.
If self-employment is an option you are considering, it is a relatively simple procedure to set yourself up as a sole trader. Perhaps you have a business in mind, or you have already started working for yourself. Either way, you will be required to register for Self Assessment with HMRC as soon as possible after starting your business.
Registering for Self-Assessment
Registering for self-assessment is very easy. You can complete paper forms to send by post, or you can register online. Either way, you will be asked to provide the following information in order to register:
- Your National Insurance number.
- Your full name and contact details – residential address, telephone number and email address.
- Details of your business – business name (this can just be your name), business address (home address or other), date you started self-employment, and the type of work you do.
Within a week or so after registration, you will receive a letter from HMRC informing you of your responsibilities. This letter will also contain your Unique Taxpayer Reference (UTR) number that you will use whenever you contact HMRC and send your annual tax return.
As a sole trader, you are responsible for all of your business finances and record-keeping. You must keep receipts and invoices for all income and expenses, like stock, equipment, overheads and staff, as well as an accurate record of all business sales and expenses, including bank statements.
Tax and National Insurance
You will be responsible for your own tax and National Insurance Contributions. If you have registered for Self-Assessment, you should receive a letter from HMRC in April or May telling you to send a tax return. You should send a tax return even if you don’t have any tax to pay.
You must complete your tax return with details of all earnings and any other income you make during the tax year (6 April to 5 April). Your tax return can be filed using paper forms or online. For online returns you will need an HMRC online account (also known as a ‘Government Gateway’ account). New sole traders can get an online account at the same time as registration.
You will normally have to register for Class 2 National Insurance which counts towards certain benefits, such as state pension and maternity allowance. Class 2 NI does not normally count toward statutory sick pay, jobseeker’s allowance or employment support allowance, so it is a good idea to make your own provisions for these situations. Class 2 NI is currently (2016-17) a flat rate of £2.80 per week on earnings over £5,965. It was previously paid on a monthly or bi-annual basis, but it should now be paid after the end of each tax year when you pay your Income Tax bill.
You will have to pay Class 4 NI contributions if your annual profits are over £8,060. You will pay 9% on profits between £8,060 and £43,000 (2016-17), and 2% on any profits above that. Class 4 NI should be worked out on your tax return and paid alongside your Income Tax. However, if you file your return online, your Class 4 contributions will be worked out for you automatically.
You may also be required to register for VAT if your annual turnover is above the VAT threshold (currently £83,000 for 2016-17). For further guidance please visit the HMRC website.
Annual tax returns and record-keeping should be fairly straightforward for many sole traders who work alone but the larger your business, the more complicated these accounting matters could become. If you feel this is something you will struggle with, it would be advisable to get an accountant or adviser to assist you, thus avoiding any problems or penalties from HMRC.
The self-employed sector in the UK is booming, and running your own business can be incredibly rewarding and satisfying, despite the responsibility of dealing with your own tax. Just make sure you register with HMRC as soon as you can, try to stay on top of things at all times, keep an organised filing system for receipts, invoices, bills, etc, and keep every document that relates to your business, even if you think it won’t be required… you never know. If everything is organised and methodical, it will make your annual responsibilities much easier and your tax returns are more likely to be accurate.
There’s a wealth of support and advice available for setting up a sole trader, and the information provided here should in no way replace any information you are given by HMRC or other government bodies. If you would like to know more about becoming self-employed, the HMRC website contains everything you need to know and it is very user-friendly.
If you are an existing sole-trader and your business is becoming rather busy, Blue Square Offices can provide a variety of services to support you, such as a prestigious business address, telephone answering and mail handling services. We also have a great selection of offices and videoconferencing rooms in Glasgow for any meetings you may wish to have with important clients or suppliers, adding that professional touch to your business.