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Self Employment

Sam Goldwyn

"The harder I work, the luckier I get."

How should I administer my business?

If you are self employed you will be paid gross by your customers and will pay tax on your profits through your self assessment tax return.

You will invoice your customers and it is important that you keep proper records for tax purposes. You do not have to have a separate business bank account but many people find it useful to keep their business affairs apart from their personal finances.

You must keep copies of the invoices issued to customers and your receipts for expenses. You should keep a record of business income and expenses, either in a spreadsheet or a bookkeeping software package. The rules for record keeping as they relate to VAT registered businesses are described here.

You must complete a self assessment tax return each year to disclose your business profits and to claim all of your costs and capital allowances.

Further details relating to tax returns and record keeping are on our Self Assessment page.

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Do you need help with any of the issues discussed on this page?

If you need assistance with UK tax filing we can complete and file a return for you with all tax calculations taken care of.

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What do I need to tell HM Revenue & Customs?

You must tell HMRC that you are trading and you must do so by registering for self assessment by October 5 after the tax year in which you started to trade.

If your turnover exceeds £85,000 in any 12 month period (£90,000 from April 1, 2024) you must register for VAT. You must tell HMRC within 30 days of your turnover reaching this level. See our VAT page.

You must complete a self assessment tax return each year. If you are in business HMRC has a guide on how to register for self assessment at the link below :

https://www.gov.uk/register-for-self-assessment/self-employed

How do I pay my tax?

Your first tax bill will be on January 31st following the end of your first tax year - so if you start the business in May 2023 your first year is 2023/24 (year ended April 5, 2024) and the tax for that year is due for payment by January 31st 2025.

At the same time you may also be required to pay the first payment of tax for the next year so you will pay one and a half years' tax in one go. This usually only happens in your first year of payment.

Payments on account are based on the tax payment for the previous year and fall due on January 31st in the tax year to which they relate and July 31st following.

So, in this example, if your 2023/24 tax payment (due January 31st 2025) is £6,000, you would also make payments on account for 2024/25 of £3,000 on January 31st 2025 and £3,000 on July 31st 2025.

Further details relating to tax payments and payments on account are on our Self Assessment page.

Should I trade as a limited company?

Trading as a limited company will give the directors a measure of protection against commercial creditors.

A sole trader or partner is fully liable for the debts of their business and may be made bankrupt if the business fails. A company director is usually only liable for the company debts to the extent of his share capital in the company, except in cases of fraudulent trading.

The tax implications of forming a limited company are wide ranging and professional advice should be taken before trading as a limited company.

See our Limited Companies page for more information.

Am I employed or self employed?

There are no definitive rules to say whether a person is employed or self employed. Usually, the distinction is whether you are working under a contract of service (employment) or a contract for services.

There have been a number of cases in the courts which have attempted to make this distinction. Following those cases HMRC will usually look at the following factors -

If you can answer 'Yes' to the following questions, you are probably employed :

    •  Do you yourself have to do the work rather than hire someone else to do it for you?

    •  Can someone tell you at any time what to do or when and how to do it?

    •  Are you paid by the hour, week, or month? Can you get overtime pay?

    •  Do you work set hours, or a given number of hours a week or month?

    •  Do you work at the premises of the person you work for, or at a place or places he or she decides?

If you can answer 'Yes' to the following questions, it will usually mean you are self-employed.

    •  Do you have the final say in how the business is run?

    •  Do you risk your own money in the business?

    •  Are you responsible for meeting the losses as well as taking the profits?

    •  Do you provide the main items of equipment you need to do your job, not just the small tools many employees provide for themselves?

    •  Are you free to hire other people on your own terms to do the work you have taken on? Do you pay them out of your own pocket?

    •  Do you have to correct unsatisfactory work in your own time and at your own expenses?

Determining the correct status - employed or self employed - is important for tax purposes. If you are self employed you are responsible for accounting for your own tax and national insurance.

The rules to decide employment status are complex but HMRC have produced a tool which will help to determine the correct status :  

https://www.gov.uk/guidance/check-employment-status-for-tax


What business records should I keep?

It is a legal requirement to keep proper tax records. HMRC have a detailed web page on the subject here.

You may need to consider whether your business needs to be registered with a supervisory body and to comply with money laundering regulations.

The regulations are in place to stop criminal and terrorist activity by requiring businesses to take a risk based approach to their clients and report any suspicious transactions to the National Crime Agency.

The regulations apply to a number of different business sectors, including accountants, financial service businesses, estate agents and letting agents, art dealers, solicitors, bill payment service providers, telecom or digital payment service providers and providers of trust or similar company services. It also applies if your business has high value (over €10,000) cash transactions.

Every business covered by the regulations must be monitored by a supervisory authority. Your business may already be supervised, for example, because you’re authorised by the Financial Conduct Authority (FCA) or belong to a professional body like the Law Society.

There is guidance by business sector at the link below

https://www.gov.uk/guidance/money-laundering-regulations-your-responsibilities#more-information-on-how-to-comply

Details of how to register will depend on your business sector and there is a guide at the link below

https://www.gov.uk/anti-money-laundering-registration


A word about Money Laundering Regulations

The two methods of recording business transactions are

    •  cash basis

    •  accrual accounting

These two methods differ in how they recognise income and expenses.


Cash Basis

Under cash basis, transactions are recorded only when there is a receipt or payment of cash. Using this method means income is recorded at the time of cash receipt and expenses are recorded when they are paid.

This method is vey simplified and was developed for the smallest of businesses which have simple (and relatively few) transactions.

Using the cash basis can have a disadvantage as it doesn’t follow recognised accounting standards and the business may need to prepare accounts on the accruals basis for a bank loan or other purpose.

At the moment, the cash basis is available if the business turnover is below £150,000 per year. Certain types of business where special tax rules apply are not eligible to elect for this basis and limited companies cannot use the cash basis.


Accrual Accounting

Accrual accounting recognises transactions when income is earned or when an expense is incurred, regardless of when the cash is received or paid.

Income is recorded at the time it is invoiced (and sometimes when there is uninvoiced work in progress) rather than when payment is received. Costs are recorded when an invoice is received from your supplier, even if you have not paid the bill.

Accrual accounting is beneficial because it provides a more accurate picture of the financial performance of the business and uses internationally recognised accounting standards.

Accounts using the accruals basis will give an accurate record of the business debtors and creditors. The downside to accrual accounting is it requires more complex bookkeeping.


Upcoming Changes - Extending the Cash Basis

Following a government consultation in 2023, changes to the rules on the use of cash basis are being introduced from 6 April 2024, the beginning of the 2024/25 tax year.

The changes affect all individuals who are self-employed or a partner in a partnership.

From April 2024 the cash basis will be the default method of calculating taxable profits but businesses can opt out of the default basis as part of their tax return disclosures and continue to use the accrual method.

Turnover thresholds for businesses to use the cash basis are removed from April 2024 and the restrictions of -

    •  a £500 limit on interest deductions

    •  using relief for losses

are also removed from April 2024.

Reporting Profits - the Basis of Accounting