Self Employed Toolkit
Everything you need to know about being Self Employed
With the rising costs in childcare and everyday life in general, households are finding it hard to have that perfect balance of work, childcare and income. This has resulted in many families having to work around each other, getting extra jobs or working every ounce of overtime available. This is one reason many people are opting to become self-employed which enables them to work around their family life and still be able to bring something into the household income.
There has been a huge rise in people, especially mothers, trying to find a source of self-employed income whether it be in more traditional roles such as childminding, ironing, cleaning, dog walking and book keeping, in selling roles such as crafts, direct sales and drop shipping or online roles such as audio transcription, web search evaluation and blogging.
A lot of people get scared when the phrase “registering as self-employed” comes into the equation. Dealing with HMRC really isn’t the minefield that some people expect and when it comes to registering, I don’t think there is anything easier.
It can be done within 10 minutes online via their website or over the phone on 0300 200 3310; I do recommend doing it online, it is a lot quicker. Then within 10 days you will receive a confirmation letter and you are ready to go. You have to register within 3 months of trading, the sooner the better.
You need to keep a record of everything business related that comes in and out; a simple excel spreadsheet can keep track all your income/outgoings. Make sure you keep all invoices and receipts that are business related as these will be used as proof should HMRC request it after you do your annual tax return. Digital invoices/receipts are easy to keep a record of, ensure they are backed up and a dedicated file for your paperwork (paper copies) should ensure they are also kept safe.
Depending on your business, certain things can be classed as expenses which are deducted from your annual gross earnings before any tax is calculated. You only pay tax on your profit so income – outgoings = profit.
What can be classed as an expense? Well, that all depends on the business you run. If you work from home then you can take in to account things like utilities (electricity, heating etc). HMRC have a simple way of taking that into account based on the hours you work from home – for example, working 25 hours a month from home means you can deduct a flat rate of £10 a month as your expenses. Expenses can be rather confusing, there is plenty of information on the HMRC website but if you are still confused then it is always a good idea to give them a ring to clarify anything or seek the advice of an accountant (at a cost).
Each year, everyone who is registered as self-employed is required to fill in a self-assessment form; whether you have made profit or not. HMRC will send you a reminder notice which will prompt you to complete this either online, via telephone or through the post – again I opt for online as it is so quick and simple. This is where good record keeping comes in handy as you will need to know how much your income and outgoings were over the tax year. If you are also employed (an employee for a company) you will also need to include your earnings for the same year from all paid jobs.
Once your assessment is complete you will be given a figure that is your payable tax and national insurance for that year. If you do not complete your self-assessment then you will receive a fine for not doing so. Again, if you have any doubts or questions then give HMRC a call. They are extremely helpful and it is best to get it sorted rather than ignoring something you don’t understand.
Paying Income Tax and National Insurance
Once your self-assessment is complete you will receive a figure for your tax and national insurance contributions.
Income tax is paid on all earnings over the personal allowance of £10,600 (2015-2016), the basic rate is 20% but higher rates are payable depending on your total income – see current rates and allowances for more information.
National Insurance contributions are paid at a lower earnings rate than Income Tax, if you are making a profit of £5,965 or more a year then you will be required to pay NI contributions. If you earn more than £5,965 but less than £8,060 you are required to pay £2.80 per week for Class 2 contributions. If you earn over £8,060 the you are expected to pay Class 2 and Class 4, which is 9% of your profits (and 2% on profits over £42,385 should you earn that much). If you are employed at the same time as being self-employed then your employer will take care of your tax and National Insurance for your employment and you will be responsible for payment on your self-employed earnings.
If you earn under the threshold then you will be issued with an exemption certificate, this means that you do not have to make any contributions but this can lead to gaps of contributions in your record which can ultimately harm your entitlement to a state pension and other benefits such as maternity pay or jobseekers allowance.
To ensure you don’t have any gaps in your national insurance contributions you can do one of two things.
Child benefit: If you receive child benefit for a child under the age of 12 you should automatically receive credits towards your state pension (these credits do not count towards any other work related benefits).
Class 3 – Voluntary contributions: You can pay these if you are not eligible to pay Class 2 or to fill any gaps that might have occurred in your record, again these only credit towards your state pension.