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Income Tax & National Insurance
Registering as self-employed
As soon as you start up in business on your own, you must register as self-employed with HMRC. You can do this by down-loading, or obtaining form CWF1 from HMRC (see link to HMRC below in "Resouces" section).
Even if you are employed, and intend to be self-employed in your spare time, you still need to register.
Failure to register within the first three full months of becoming self-employed may result in a penalty of £100.
National Insurance
You will "immediately" be asked to pay monthly Class 2 National Insurance contributions (NICs). The 2009/10 cost of these is £2.40 a week. HMRC recommends that your Class 2 NICs are paid monthly by direct debit.
If you are employed (and paying Class 1 NICs) you must still pay Class 2 NICs.
Class 2 NICs count towards the basic state pension, maternity allowance, incapacity and widow's benefits. They do not count towards Jobseekers Allowance.
If your total earnings are expected to be less than a prescribed amount, you may be entitled to a Small Earnings Exception (SEE), meaning you don't have to pay any Class 2 NICs. The 2009/10 earnings threshold is £5,075 p.a.
If your annual profits exceed a prescribed amount you will also have to pay Class 4 NICs. The 2009/10 threshold is £5,715. Class 4 NICs are calculated and paid with your income tax at the end of the year.
Value Added Tax
You will be required to charge customers, and pay VAT to HMRC, only if your business has, or you expect it to have, a turnover of more than £68,000 a year!
Record Keeping
You need to keep your business records and personal records separate. It will help if you have a separate business bank account.
Your basic records will normally include:
- a record of all your sales, with copies of any invoices you have issued,
- a record of all your business purchases and expenses, with copies of invoices,
- details of any amounts you personally pay into or take from the business, and
- copies of business bank statements.
You can be charged up to £3,000 for failure to maintain or retain the records you need to make a tax return.
By law, you must keep business records for at least five years and ten months after the end of the tax year the records relate to.
Accounting
You should maintain a set of accounts that record your income and expenditure, and accumulate annual totals. These do not need to be elaborate: a simple note book or spreadsheet record will suffice.
Your accounting year can start from any date you wish, but it is much easier to fall in line with the standard HMRC tax year, i.e. 6th April to 5th April in the following year. In other words, if you start self-employment on say 1st August, your first year of trading will be a nine month period. Thereafter your accounting year will align with the tax year.
At the end of your first trading year (around March/April), HMRC will write and ask you to complete a tax return. Your return must be submitted by 31st October.
As a self-employed person, you may alternatively complete an on-line tax return, and need to do this by 31st January in the following year (i.e. 2009/10 tax returns must be submitted by 31st January 2011). If you wish to complete an on-line tax return, you must first obtain a registration number, so do not leave your first on-line tax return until the last minute.
Completion of tax returns is relatively easy. Most of the questions asked will not apply (and if they do, then you are probably already being asked to complete a Tax return). You merely need to be able to provide a cash total for your gross income (including any other income such as bank or building society interest), and your total business expenditure. The balance between the two is your net profit (or net loss), and this will be taxed if it exceeds your annual personal tax allowance. The 2009/10 personal allowance (for someone of working age) is £6,475.
Resources
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Business Link have an easy to follow Tax and NI guidance for start-ups, plus links to more comprehensive guides. |
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For comprehensive information, and to register for on-line tax returns, visit HM Revenue & Customs. |
Article date: 02 September 2009 ¦ Suggest an amendment or a new resource
