There are many benefits to being self-employed. There's the relief of not having a boss keeping tabs on every move you make for starters. On top of that, there's the freedom of choosing the hours you work each week. Not to mention creating your own platform and space to use the skills and attributes you have to their best abilities.
However, there are of course also many downsides to self-employment. The self-employed don't have the luxury of employee benefits such as holiday pay or guaranteed sick pay. Their income can fluctuate and be very unstable at times. And if they have had a period of unsteady income, the self-employed are also liable to take on too much work to compensate and become overloaded with commitments.
Despite the negatives, it would seem that workers have been focussing on the positives in recent years. Over the course of 20 years, the number of self-employed people in the UK steadily rose, before peaking at over five million in February 2020. However, that number then fell sharply after the onset of the Covid-19 pandemic and currently stands at around 4.2 million. This is likely because the self-employed were particularly hard hit by the financial repercussions of the lockdowns. However, with still over four million registered self-employed and the culture of work having changed so drastically since 2020, it is important to know what steps to take if you are planning on becoming self-employed.
If you are a freelancer, small business owner, in a business partnership, or if you are considering taking the leap into self-employment, you will need to register with HMRC to ensure you are paying all the correct tax rates. In this article, we will look at how you register your self-employed status, who is considered self-employed, and how your taxes will change once you register.
When you become self-employed you must register your status with HMRC in order to be sure that you are paying the correct taxes. There are a few options when it comes to registration, but you will most likely need to set yourself up as a sole trader. Other options include setting up your own limited company or joining a business partnership.
You will need to register on the government's website to pay your taxes through Self-Assessment and inform HMRC that this is what you are doing. Whether you are a freelancer, small business owner, or sole trader, you need to keep a record of all your sales, expenses, and invoices related to your work. This not only ensures you pay the right amount of tax but also means you will be able to reclaim some of your expenses. You will file your tax returns every year and can either do this through paper documents and take your returns to a tax office, or you can do it online by completing your returns on the government's website.
So let's jump in and take a look at the different types of self-employment.
Who is self-employed?
It may sound like an obvious question as to who is and isn't self-employed, however, many people are employed and self-employed at the same time and it can be confusing to know when exactly to register. For example, you may work three days a week for a company and two days a week for your own business. Or maybe you work in the day for a company and run your own business in the evenings.
With these discrepancies in mind, let's have a look at the government's own guidelines on whether a person is or isn't self-employed.
The UK government's website states that you are probably self-employed if you:
- run your business for yourself and take responsibility for its success or failure
- have several customers at the same time
- can decide how, where and when you do your work
- can hire other people at your own expense to help you or to do the work for you
- provide the main items of equipment to do your work
- are responsible for finishing any unsatisfactory work in your own time
- charge an agreed fixed price for your work
- sell goods or services to make a profit.
Additionally, if you sell goods or services you are classed as a trader. If you are trading, you are self-employed.
Again, the government's own website states that you are likely to be trading if you:
- sell regularly to make a profit
- make items to sell for profit
- sell items on a regular basis, either online, at car boot sales, or through classified adverts
- earn commission from selling goods for other people
- are paid for a service you provide.
While these lists are not exhaustive, they are good indicators of what makes for a self-employed worker. If one or more of the above working conditions applies to you, you will likely need to register as self-employed.
As we saw before, most self-employed people will need to register themselves as sole traders. A sole trader is anyone who runs their own business as an individual and is self-employed, it also applies to freelancers.
Registering as a sole trader is the simplest way of paying taxes if you are self-employed.
You will need to register yourself as a sole trader if any of the following apply:
- you earned more than £1,000 from self-employment within one tax year (that's usually April to April)
- you need to prove you’re self-employed. For example, if you want to claim Tax-Free Childcare
- you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits.
If any of those criteria apply to you, you will need to register your status with HMRC.
How to register as a sole trader
To register as a sole trader you need to set up a Self Assessment tax return account online. This allows you to complete your own tax returns for HMRC.
This service is also for people who aren't fully self-employed but still need to complete a tax return. For example, if you receive additional income from letting out a room or a property, or if you run a small business in your spare time.
Once you have registered as a sole trader it is vital that you send off your Self-Assessment tax return each year. To keep up with your returns, you will need to keep records of all your expenses, sales, and invoices.
Tax returns keep you on the right side of the law, but they also ensure you are able to reclaim any tax payments you are eligible for. So it is beneficial for both you and HMRC to keep on top of your returns.
Limited companies and business partnerships
There are alternative ways of registering as self-employed beyond being a sole trader. You may wish to set up a limited company for your business, or you may enter into a business partnership.
Both alternatives have different registration processes. So let's take a look at how and why you may wish to register a limited company or a business partnership.
A limited company is a company that is either ‘limited by shares' or ‘limited by guarantee’.
Most 'limited companies' are limited by shares. A company that is limited by shares is a form of business that is legally separate from its owners. The company must also have separate finances from the personal finances of the owner or owners. The company must have shares and at least one shareholder. The company can keep any profits it makes after tax.
Limited by guarantee companies are usually ‘not for profit’. This again means that the company is legally separate from its owners and has separate finances from any personal finances of the owners. But these companies usually do not have shareholders, instead, they have guarantors who cover a certain amount in the event of insolvency. The business must invest all profits it makes back into the company.
If you are looking to become self-employed to earn an income from your own company, you will need to set up and register your company.
If you want to register either a limited or guaranteed company, you can do so here.
The other alternative way of registering your status as self-employed is to set up a business partnership. A business partnership does not have to be between two people, although it can be. It is often a partnership between an individual and a company and could even be with a limited company, though a business partnership can take all manner of forms.
In a business partnership, you and your partner (or partners) are collectively responsible for the business. This includes:
- any losses your business makes
- bills for things you buy for your business, like stock or equipment.
The profits on the business are shared and each partner pays tax on their share.
How to register a business partnership.
When you set up a business partnership you need to:
- choose a nominated partner. This partner will be responsible for registering all the tax returns of the partnership.
- register the partnership with HMRC.
You can register the partnership with HMRC here.
VAT for the self-employed
If you are self-employed or run your own business and have turned over more than £85,000 in a single year, you will need to register for VAT. This is because you will need to start charging VAT on everything over the £85,000 threshold.
So if you are self-employed and made £100,000 in a year, you need to charge £15,000 of VAT and then pay that to HMRC.
When you register for VAT you will be given a VAT number that must then appear on your tax returns and invoices.
Any sole trader or business can also reclaim VAT spent on goods and services purchased solely for business use only. For example, internet use for business purposes can have the VAT reclaimed, as can telephone calls and office expenses. So it is vital to keep records and receipts of payments as VAT rebates can save a lot of money.
To reclaim any VAT, you must keep a record of your purchases and then submit a VAT return to HMRC. It is essential you keep on top of your returns as VAT rebates can end up saving you thousands each year.
If you have recently made the leap into self-employment then it is vital that you register your new self-employed status. Doing so is quick and easy, and it ensures that you are paying the right taxes and are receiving the rebates you are eligible for.
If you need to register yourself as self-employed you can log on to the government's website here and get your employment status updated today.