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).
Being your own boss comes with attractive perks. Also, there are additional responsibilities to be fulfilled as compared to when you are working for someone else. Know the pros and cons of being self-employed so that you may pre-empt disturbances to your professional life.
You don’t get paid if you don’t work, and you don’t have an employer to fall back on for insurance. You have to pay for the cover. Self-employed tradesmen need insurance to protect their business from costs that may arise due to unforeseen situations. You may get injured or fall sick. You may not be able to work for a prolonged period. When you are on your own, this means a loss of income coupled with medical expenses. You may qualify for state benefits, but those may not be enough to cover all the expenses that you will likely incur.
Choose a self-employed insurance provider that understands the risks involved in your specific trade. Generic cover can leave you vulnerable to expenses from events not covered. Tradesman Saver provides insurance tailored to meet your needs. Check out the exhaustive list of trades covered by Tradesman Saver. You can easily create a bespoke policy and get instant cover from the moment you pay. Public liability, financial loss, products liability, employers liability, professional indemnity, business content and personal accident are covers you can choose from.
A well-rounded insurance policy for self-employed tradesmen offers many benefits. It protects you from financial claims that your employees may bring against you, or a lawsuit that a client may file to recover costs of damage caused by your employee.
There are simply too many situations that can lead to a claim against you. Law firms attract clients with an offer of accepting fees only if they win a claim for the client. This encourages people to file claims. They have nothing to lose. But, you do. At the very least, you lose time and money. And, there’s always the risk of the plaintiff suing you successfully. Self-employed insurance guards against such risks.
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.
Child Tax Credits, Working Tax Credits, Housing Benefit, Council Tax Benefit etc
This question crops up time and time again, “If I become self-employed with I still be entitled to x and y and z benefit”. The simple answer is: it depends on your circumstances. The only people who can really tell you how going self-employed will effect anything that you currently claim (child tax credits, working tax credits, housing benefit, council tax benefit etc) are the people who issue the benefits or the Citizen’s Advice Bureau (CAB). They will have the time to go through each scenario with you to tell you the outcome and are the best people to consult if you rely on any of these benefits; especially with the Universal Credit coming into effect around the country. There are a couple of websites where you can get a rough idea of entitlements if you are wanting to crunch a few numbers, these are www.entitledto.co.uk and the Tax Credit Calculator.
The reason it is so hard for anyone to give you a straight answer to this is because it can vary so much depending on your personal circumstances such as number of children, relationship status, other incomes and even whereabouts in the country you are; and if you choose a self-employment role that has a fluctuating income, such as direct sales, then it makes it even harder to just tell you that you will get xx benefits.
Holiday Pay, Statutory Sick Pay, Statutory Maternity/Paternity Pay and Maternity/Paternity Allowance
One thing you need to realise about becoming self-employed is that you are not automatically entitled to any of these benefits. These are employed benefits and only Maternity/Paternity Allowance is payable to those who qualify and have been paying Class 2 NI contributions. You need to include the cost of these in your service costs or put away existing earnings to cover you should you need to take any time off.
Setting up a business
A few years ago it was really easy to grab a grant, or some funding to start your own business. You could approach your local council or job centre with a business plan and they would, basically, hand you some money. Unfortunately a lot of funding for new businesses has dried up but it hasn’t all completely gone. If you have an idea for a new business there are still schemes available to help get you off to a good start – they may not be lump sums of cash but they are incentives. Things like discounted rental rates for town centre property, free business advice or business courses. Availability really does depend on each individual council and how they spend the funding they are given; you can check the governments Business Finance Support Finder to see if there is any help local to you.
Getting finance when you are self-employed
Over the last few years it has become much harder for people who are self-employed to obtain finance, whether that is in the form of a new car, mobile contract or mortgage. A lot of companies, especially mortgage companies, require two-three years of accounts to show your earnings and prove that you are able to meet the payments; which is another reason to keep on top with your records. If you cannot prove your earnings then you are really unlikely to get any real finance beyond mobile contracts.
If you are looking at getting a mortgage then using a mortgage broker is probably the best way of finding a mortgage that will meet your needs as they will do all the leg work. A few things such as making sure you are on the electoral register, having a small amount of credit – such as a credit card you pay off fully each month, and a good stint in your current property should also help with getting finance as companies like to see that you are stable; not moving every 6 months and maxed out in credit.
At the end of the day, becoming self-employed is relatively simple but if there is anything about the process you find confusing then, as mentioned in this post already, seek advice from either HMRC, CAB or a qualified accountant who can advise you where needed.
Maternity Allowance and being Self Employed (Written by KatyKicker)
When you register as self-employed it is worth thinking about your future plans for a child. When I became self-employed I volunteered to pay Class 2 national insurance contributions, despite being below the threshold for NI for my first year of self-employment. Class 2 national insurances are just £2.80 per week at present and this is a fantastic way to guarantee that you will be eligible for maternity allowance when you require it.
Maternity allowance is available to all self-employed individuals who have made the necessary amount of contributions. The weekly payment, which you can receive for 39 weeks, is up to £139.58 (2015/6 tax year). The full weekly amount will automatically be awarded to anyone self-employed who has made the necessary contributions during the test period. Maternity allowance can be applied for as soon as you reach 26 weeks pregnant and you can receive it from your 29th week of pregnancy, paid in 2 or 4 weekly increments. You must make contributions for at least 26 weeks of the qualifying 66 week test period before the week that your baby is born. If you have recently found out that you are pregnant, or you are planning to have a baby soon, then there is still time to make enough voluntary class 2 contributions to be eligible for the full weekly amount. You can even call HMRC in order to make a payment to ensure that your test period is covered.