Whether you are closing up a business because the losses were too great, looking for a more stable income, or have found a role in your dream organisation, there are many reasons why you may be leaving self-employment and moving to regular employment.
Although the self-employed lifestyle has many perks - you can holiday whenever you want, be your own boss, and set a schedule that works for you - it also has many drawbacks and doesn't offer the same security that regular employment does, such as pension schemes, holiday pay, and childcare leave. And there is also the important detail of taxation which, when you're self-employed you either have to complete yourself or pay for the services of an accountant.
So what do you have to do when you stop being self-employed? Who do you need to inform and how do you inform them? And how, if at all, will it affect your taxes?
We are going to explore all this and more as we take you through, what to do when you stop being self-employed.
If you have stopped being self-employed working as a sole trader or are leaving a business partnership, then you must inform HMRC as soon as possible. You also need to complete a final self-assessment tax return and close your PAYE scheme if you employ other people.
When you stop being self-employed, you may have to pay slightly more tax in your final tax year if you sell your business equipment, company assets, etc. However, there are also additional tax reliefs that are made available to people who are ending their time as sole traders or as business partners.
So let's jump in and find out how exactly you inform HMRC that you are no longer going to be self-employed.
To inform HMRC that you plan to no longer be self-employed or are leaving a business partnership, you must do so through your online HMRC account.
This is the same account you would have set up when you first became self-employed and began filing self-assessment tax returns. You can also print off the online form and send it by post.
Alternatively, you can call HMRC on 0300 200 3310 and inform them of your status over the phone.
You will need to have both your National Insurance number and your Unique Taxpayer Reference to hand.
Informing HMRC of your new status doesn't take long and is very important as you can end up paying fines and additional taxes if you don't let them know or tell them too late.
If you work as a contractor or subcontractor in the construction industry, then the process is slightly different. You must still inform HMRC but only after you have told the Construction Industry Scheme (CIS). You can contact them by calling the helpline on 0300 200 3210.
When you are no longer going to be self-employed, you must submit one final self-assessment tax return to see you through the current tax year.
As with all tax returns, your final one must be completed before the deadlines of either January 31st for online submissions, or October 31st for postal submissions.
When you complete your final return, you will need to calculate various expenses that may have been part of the process of stopping being self-employed. These may include:
- your capital allowances, which may need to be balanced if you have sold equipment or machinery that was bought specifically for your business.
- your allowable expenses, which may go up during the process of closing your business down.
- Capital Gains Tax, which may need to be paid if there are particular assets you have sold when closing your business.
- calculating your final profits or losses.
If you are a partner in a business partnership, then you will need to nominate one of you to also send off a final Partnership Tax Return.
You can employ the help of an accountant if you struggle with any of the processes involved in completing your tax returns.
Although there are some additional taxes you might have to pay when you stop being self-employed, you may also be able to reduce your final tax bill by claiming certain tax reliefs.
These may include:
- Business Asset Disposal Relief. This reduces the amount of Capital Gains Tax you have to pay when you sell your business assets. To qualify for this you must have been registered in a business partnership or been a sole trader for at least two years.
- Overlap Relief. This stops you from being taxed twice on any profits you have made when you stop being self-employed in the middle of a tax year.
- Terminal Loss Relief. This offsets any losses you made in your last tax year against your profits in the previous three tax years. So if you are closing your business due to recent losses, you will get a tax rebate on the taxes you paid on your profits in previous years.
Make sure you look into all the reliefs you are eligible for as they could end up saving you a lot of money.
Once you are no longer self-employed, you should still keep your business records backdated for up to six years, until a whole tax year has passed since your status change.
For example, if you stopped being self-employed in June 2022, you should keep the business records until April 2024, as in April 2023 a whole tax year will not yet have passed.
Business records are important documents that can help you answer any questions HMRC may have regarding the taxes of your former business.
Records may include invoices, receipts, payslips, bank statements, loans, contracts, etc.
Not all self-employed people are registered with HMRC as they do not earn above a certain threshold.
If you earn £1,000 or less in a tax year as a sole trader, then you don't need to be registered as self-employed with HMRC.
However, you may choose to stay registered as self-employed in order to be able to claim things such as tax-free childcare or to continue to make voluntary National Insurance contributions so you can still qualify for a State Pension.
If you are leaving self-employment and never registered with HMRC as you didn't earn more than the threshold, then you do not need to inform them of your intentions.
If you are registered for VAT then you must also cancel your registration when you stop being self-employed. Your registration will not cancel automatically so you must do this in addition to the other processes we have outlined.
You must cancel your VAT registration within 30 days of telling HMRC you are no longer self-employed. Failure to do so could result in fines.
If you run a business and employ other people as part of the business you will need to close your PAYE scheme when the business closes.
You must:
- send final payroll reports to HMRC.
- pay any outstanding tax and National Insurance contributions to HMRC within 17 days of the business closing.
- send your employee expenses and benefits (P11D) returns.
- enter the leaving date on each employee’s payroll record. This may be the same for each employee, but you must still write it in all of them.
- give your employees a P45.
If your business has outstanding debts that you are unable to pay, you will be held personally liable.
If you are unable to pay of the debts, then your business becomes insolvent.
In such scenarios, you may be taken to court by your creditors and or be forced to declare bankruptcy.
If you do not inform HMRC that you are no longer going to be self-employed then HMRC will assume that you are continuing self-employment.
This means that you will be expected to complete a self-assessment tax return each year and you will be fined if you fail to do one. The fine can be well over £1,000 so it is worth simply signing in to your online account and letting HMRC know what your intentions are.
On top of the fine, HMRC will also write an estimated tax bill that is based on your previous earnings. These bills can be huge, so do your best to avoid them.
When you stop being self-employed you must inform HMRC as soon as you can so that they know to stop expecting tax returns from you. You must then also complete a final tax return that includes any of the additional taxes you may be liable to pay. Make sure you explore the extra tax reliefs you will be eligible for as these could end up saving you significant amounts of money.
If you employ other people you also need to close your PAYE scheme and send off the final payrolls. And if you are VAT registered you need to close your VAT account.
The process of informing HMRC of your status and de-registering yourself as self-employed is simple and should be completed as promptly as possible. Failure to do so can result in fines and additional taxes that add up to hefty numbers.