People can become self-employed for many reasons. Sometimes it is a long-term career plan that they have accomplished, sometimes it happens by chance – such as a redundancy forcing you to make alternative plans, and sometimes it is an accident – for example applying for a job and realising they want to take you on as self-employed rather than through payroll.
Whatever the reason, it is important to get a good understanding of everything that needs to be done at the start of the process to ensure that completing your self-assessment personal tax return is as simple and stress-free as possible.
It is important to get an understanding of the different ways you can work for yourself. I wrote a blog called “What is self-employment?” which may be useful to read to get an understanding of the difference between being a sole trader and working for yourself through a limited company.
Registering with HMRC
If you definitely want to continue as self-employed, you will need to register with HMRC as such so that you get a Unique Taxpayer Reference (commonly abbreviated to UTR) which will allow you file your tax return. Without this, you will not be able to submit your return. The deadline for registering is the 5th of October following the end of the tax year that you become self-employed in. For example, if you became self-employed on the 1st of September 2022, that is within the 2022-23 tax year (tax years run from the 6th of April to the 5th of April the following year), meaning you would need to register by 5th October 2023.
It may be that for some reason you already have a UTR (for example, you may rent out a property). It will be important to tell HMRC you are self-employed using the form CWF1 (under the If you’ve registered before but did not send a return last year on the link above). The reason for this is so that you will be correctly registered for National Insurance (NI) Class 2 which is paid by self-employed people on a weekly rate. Strangely, HMRC’s systems will automatically calculate Class 4 NI without this form, but not Class 2 NI, despite the fact that both are only paid if you are self-employed.
You will also need to select your financial year. It is possible to use a financial year that doesn’t coincide with HMRC’s, however it adds complexity to your accounts. HMRC are also looking to mandate a year end of either 31st March or 5th April in the near future, so it makes sense to pick one of those dates initially to prevent the need to change in the future. This will likely mean that your first reporting year is less than 12 months, however if you need year on year reporting, there is nothing to stop you viewing your data in an alternative way to do so.
Banking
I strongly advise setting up a bank account that is only for your self-employed incomings and outgoings. This will make it much easier to identify income and expenses when preparing your accounts, as there won’t be personal transactions muddying the waters. This will mean that it will take you or your accountant much less time to produce your tax return, therefore saving you either time or money. When you want to spend the money in that account for personal use, simply transfer it over to a personal account. You may want to make sure you are retaining a portion of your earnings in the account as a contribution towards your end of year tax bill, although this is not essential.
Software
I have written before about the use of software and why it is a good idea, so I won’t repeat myself too much here suffice to say it should make your life easier. One good reason for starting to use it straight away is that HMRC are bringing in a system called Making Tax Digital (MTD) which will require quarterly reporting in a digital format – this will be significantly easier if you are using software to keep your records.
I wrote about how this would affect you in May 2022. In December 2022, a delay to the implementation of this was announced, meaning it will come into effect in April 2026 for self-employed individuals with income over £50,000, and in April 2027 for those with income over £30,000. Despite the delay, I would recommend using this time to ensure that you are using software efficiently so that at the implementation of MTD you are as ready as you can be.
What costs can I claim?
This is one of the most common questions we get asked. In general, you should be able to claim anything that is business related. If there is some element of dual usage (e.g. a phone bill that has both work and personal usage) then you will need to apportion the cost.
HMRC allow certain things as fixed allowances. The two main ones are mileage and working from home. I would recommend using both of these, for slightly different reasons.
Mileage is more beneficial to you than simply claiming petrol costs as it is also intended to cover wear and tear, tax and insurance costs, so it is the more favourable option.
For the working from home allowance, it is much quicker to claim the set allowance based on the number of hours you work from home rather than adding up all of your bills, calculating the room usage and room as a portion of your total living space. When I have compared the two previously, there has also not been much difference between the two calculated values, so the easier option of using the allowance will save you time that you can spend running your business. On top of the allowance, you can also claim a portion of your broadband bill that relates to your business usage.
There are certain things you cannot claim, for example regular clothing (although you can claim protective or business branded clothing), and if you are in any doubt it is always worth consulting an accountant.
Hiring an accountant
On that note, it will be worth sharing a blog I wrote last year on whether you need an accountant. The short answer is that you are not required to hire an accountant, and many self-employed people complete their own tax returns. However you may wish to hire one to save yourself time, utilise the knowledge and support of an accountant and have confidence that your return has been filed accurately.
Taxes
Another question that we are often asked is how much tax will I pay? This is often difficult to tell part way through the year, but there are ways to estimate it. The taxes that you will be due to pay are Income Tax on your profits, so only on your incomings after all allowable expenses have been deducted.
Income tax will be at 0% below the personal allowance (currently £12,570), 20% between £12,570 and £50,270, 40% from £50,271 to £150,000 and 45% on income over that.
These are marginal rates which mean that they are charged on each pound depending on which band it is in. So, if your total earnings are £60,000, you will pay 0p on every pound up to £12,570, then 20p on every pound between £12,570 and £50,270 (so 37,700 lots of 20p, meaning a total of £7,540) and then 40p on every pound between £50,270 and £60,000 (so 9,730 lots of 40p, meaning a total of £3,892). This would give a total tax bill of £11,432, an effective rate of tax of 19% on your total income.
On top of this, you will have NI contributions on your self-employed profits. Class 2 NI kicks in after you have £11,908 of profits and is charged at a rate of £3.15 per week. For the current tax year, if your profits exceed £6,725 then you will be treated as having made Class 2 NI contributions without having to make them. The main benefit to this is that it contributes towards your state pension. It should always be possible to make voluntary contributions if you wish to do so.
Class 4 NI has the same threshold as Class 2 NI but it is charged at a rate of 9.73% on profits between the threshold and £50,270, and then at 2.73% thereafter. For our example of someone with £60,000 profit, they would pay 9.73p on every pound between £11,908 and £50,270 (so £3,732) and 2.73p on every pound thereafter (so £265) meaning a total of £3,997.
The other tax to be aware of is VAT. Unless your income is excluded from VAT due to the type of work you do, you will need to register for VAT if your turnover in any 12 month period exceeds £85,000. You therefore need to be checking on a monthly basis how much you have received from customers over the previous 12 months. It is also possible to voluntarily register for VAT so as to be able to claim back the VAT you pay on expenses. All of this is a topic for another time, but it is worth being aware of the threshold and monitoring it constantly.
What deadlines are there
Aside from the registration deadline mentioned earlier, the key deadline you need to be aware of is the 31st of January. This is the deadline for both filing and paying your tax return following the end of the tax year on the 5th of April the year before.
Obviously it is possible to file your tax return and pay your tax bill much earlier than this deadline – and I would strongly recommend trying to file as early as possible, so that you know how much you will need by the payment deadline and also to help your accountant be less stressed!
If your income exceeds certain thresholds, then you may be required to make payments on account, meaning that you will also need to put 31st July in your calendar as there will be a payment due then. This will fall in the same year as the filing deadline, so 16 months after the end of the tax year.
I wrote a blog last month explaining how to pay your tax bill which has become simpler in recent year.
Hopefully that helps you to get a good understanding of what is needed when you become self-employed, although if you have any questions, feel free to get in touch with us.
One Comment on “What to do when you become self-employed”
Pingback: Accounting issues for driving instructors | Anderson Accounts