Decided to go it alone, start your own business and become self-employed? Congratulations, you’re about to begin an incredible journey as your own boss. Self-employed people enjoy many benefits like control of their time, choosing who to work with and the pleasure of following a passion. Those are just some of the reasons that there are 4.2 million self-employed workers in the UK.
But if you’re just starting, it can be a bit daunting. Not only do you need to consider how to make your business a success, but you need to make sure that everything you’re doing is above board and legal. One of the first questions that you’ll be asking yourself is, “how do I register as self-employed?”
You may even be wondering if you need to register. Being self-employed can quickly become complicated with self-assessment tax, national insurance and registering with HM Revenue and Customs (HMRC). That’s why we’ve put together everything you need to know about becoming self-employed and registering with HMRC in one place.
Why You Need to Register as Self-Employed with HMRC
When you’re self-employed, it is a legal requirement to register with HMRC so that you can report how much you’re earning and pay the correct amount of tax and National Insurance. Failing to register can result in fines and large tax bills, so it’s prudent to work out your employment status and if you need to register.
But identifying self-employment isn’t always a straightforward as you might think. You are likely to be considered self-employed if you meet any of the following criteria:
- You run your own limited company
- You are a sole trader
- You have the option to hire other people
- You sell goods or a service for a profit regularly.
If you’re unsure of whether or not you need to register as self-employed, HMRC offers an Employment Status Indicator that can help you find out if HMRC will consider you are employed or self-employed for tax and National Insurance.
It’s also worth checking whether you need to register with HMRC as not everyone is required to register. If you work for yourself, you only need to register as self-employed once your business’s income is £1000 or more during a single tax year.
This threshold exemption is mainly for people who sell small amounts online or from odd jobs, but anyone who expects their turnover to increase beyond £1000 should inform HMRC for tax purposes.
How to Register as Self-Employed
Registering as self-employed can seem a bit daunting to anyone doing it for the first time. There’s a lot to think about: business structures, self-assessment tax returns, even just your official business name. One of the first things that you’ll need to do is work out your business structure. While there are other business structures, the most commonly chosen are:
- Sole Trader — Registering as a sole trader is the easiest to set up and usually has lower running costs. As a sole trader, you are your business, and you are liable for all business debts.
- Partnership — A partnership is a business structure for two or more people to work together. Like a sole trader, the partners are responsible for all business debts and their taxes.
- Limited Company — Forming a limited company means that your business is a separate entity to yourself. You will only be liable for the shares you’ve bought.
Choosing a business structure is a personal choice, and there’s no right or wrong choice. But whichever structure you decide on, you’ll need to register with HMRC for National Insurance and tax. You’ll also want to consider registering for Value Added Tax (VAT), and if you choose to become a limited company, you’ll need to register with Companies House.
10 Steps to Register as Self-Employed
Throughout these steps, you’ll need to make sure that you have the following personal information and contact details handy:
- Your name
- Date of birth
- Address in the UK
- National Insurance Number
- Phone number
- Email address
- Start date of your business.
If it’s your first time registering as self-employed and a self-assessment tax return, follow these steps:
- Go to HMRC and create a Government Gateway account.
- Wait to receive your Government Gateway ID.
- Log into your HMRC account and choose “add a tax,” and then select “self-assessment”.
- Choose your business structure from the options: individual, sole trader, trust or partnership.
- Select the date you started being self-employed.
- Submit your personal details.
- Enter a brief description of the work you do.
- Check all of the details carefully, and then submit your registration.
- You’ll receive a letter from HMRC with your Unique Taxpayer Reference (UTR) in the post.
- Within ten working days, you’ll receive an activation code for your UTR. Use the code to activate your UTR, and you’re all set.
The process is similar if you’ve previously submitted a tax return, but you’ll submit a CWF1 form online instead. You’ll use the same HMRC login and UTR number as when you sent a tax return last time.
When to Register as Self-Employed
HMRC recommends that self-employment registrations should be completed at the earliest time possible. So if you have decided to go self-employed, register as soon as you can.
But beyond registering as soon as possible, there is also a deadline for registration. It’s a legal requirement to register by the 5th October following the end of the tax year in which you became self-employed.
For example, if your business started in August 2020, you would need to register as self-employed with HMRC by 5th October 2021.
As we’ve shown, registration is a reasonably straightforward process, so it’s wise to register as quickly as you can once you’ve started trading. Registering at the earliest opportunity means that you can avoid a potentially hefty tax bill if anything goes wrong with your registration.
Understanding Your Self-Assessment Tax Return
Income tax is usually deducted automatically from your wages via Pay As You Earn (PAYE) when you are an employee. This means for most people, tax isn’t something they need to worry about.
But if you are self-employed or receive any income outside of employment, you need to report this to HMRC and complete a self-assessment tax return once a year. Your tax return offsets your income against expenses and allowances, which means that the amount of tax you’ll need to pay will be based on your taxable profits and not your entire income.
If you’re self-employed, it’s good to be familiar with how tax works for a sole trader or partnership. We’ve outlined some key elements that you need to know:
The Tax Year
The tax year runs from 6th April to 5th April the following year. This year’s tax year runs from 6th April 2021 to 5th April 2022 and covers any profits you’ve made during your accounting year.
Paying Tax
The profits you make from self-employed work in a tax year must be declared in your tax return. The deadline for submissions is 31st October for paper returns or 31st January for online returns. All payments of tax must be made by 31st January.
Self-Employed Responsibilities
One of the most significant responsibilities for owners of small businesses is filing your self-assessment tax return. As a business owner, you are solely responsible for your tax payments on any income for your business. Failing to complete your tax return online in time can result in penalty fees.
To stay on top of your tax return, you should keep accurate records of:
- Annual turnover and income
- Expenses
- Employee pay
By keeping accurate records, you can be sure that you pay tax correctly and know if you will likely go over the VAT threshold. If your annual turnover is above the threshold of £85,000 in a tax year, then you will need to register for VAT. However, you might choose to register for VAT if turnover is below the threshold.
If you decide to stop trading, you will need to inform HMRC that you have stopped your business. Without notification from you that you are no longer self-employed, HMRC will still expect a tax return.
If you’re looking to become self-employed, set up a new business as a sole trader or form a limited company, Mint Formations can help. Get in touch with us today, or take a look at our company formation packages.
