When starting you own business, you will need to choose the right business structure but you might not want to set up a limited company straight away. In this case, you might want to start your new business by working for yourself as a self-employed entity. If you work for yourself as a freelancer or sole trader, you'll probably need to register with HM Revenue & Customs (HMRC) for Self Assessment tax returns. But what does that mean in practice? How do you go about registering as self-employed, and what should you expect? This article explains when you need to register as self-employed with HMRC and the steps you need to follow to do this.
When are you self-employed?
To confirm your employment status and determine if you need to register with HMRC as self-employed, you can go through the following checklist:
- Do you run your business for yourself and take responsibility for its success or failure?
- Do you have several customers at the same time?
- Can you decide how, where and when you do your work?
- Can you hire other people at your own expense to help you or to do the work for you?
- Do you provide the main items of equipment to do your work?
- Are you responsible for finishing any unsatisfactory work in your own time?
- Do you charge an agreed fixed price for your work?
- Do you sell goods or services to clients to make a profit?
You can be self-employed even if you are in full-time employment with an employer if your employer has permitted you to have outside interests and you meet the criteria of the checklist above.
When do you need to register as a sole trader?
If your self-employed work generates more than £1000 in a tax year then you will need to register as a sole trader. In addition to sending a Self Assessment tax return, paying income tax on profits and Class 2 and Class 4 National insurance, a sole trader must keep records of the business’ sales and expenses using either traditional accounting or cash basis accounting methods. A sole trader can trade under their own name or choose a business name but it does not need to be registered and it must not include limited, be offensive or breach a trademark.
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How to register as self-employed with HMRC?
When you are self-employed, you will need to file your own tax returns every year and make national insurance contributions. To do this you will need to create a business tax account with HMRC which will be used for registering for Self Assessment and Class 2 National Insurance. After creating your account, you will receive a Unique Taxpayer Reference number (UTR) which you will need to provide in your correspondence with HMRC. Self-employed people need to file their tax returns before the deadlines provided by HMRC. A self-employed person’s government gateway account will be used to pay tax on earnings for the tax year which includes different types of taxes including income tax and capital gains tax.
The self-employed registration process can be completed online or by post by filling in a form on-screen and then by printing it off and positing it to HMRC.
What are the alternatives to being self-employed?
One of the benefits of being self-employed is that your company status and accounts are not publicly disclosed on Companies House. You can also claim Tax-free childcare if you can prove your are self-employed and voluntary Class 2 national insurance contributions can help you qualify for benefits.
However, the self-employed status might not be appropriate if your business idea requires funding from external investors. In this case, business owners can set up a limited company and sell shares to investors in order to raise capital. If you believe setting up a company is the right choice then you will need to incorporate your business with Companies House and choose a SIC code. You will also need to register as an employer if you wish to hire employees. In this case you will want to ensure that you have robust employment contracts to ensure your company’s intellectual property is protected. Small businesses use Legislate to create and manage lawyer-approved agreements which are tailored to their needs. To get started, simply create an online account now and select the contract you would like to create!
Legislate is a contract creation and management platform used by small businesses and startups across the UK. Once you have established your company, you will likely need to make new hires to help support you. Having gone to the effort of correctly incorporating your company, you will want to ensure that you have robust contracts in place in order to protect your small business. Legislate provides lawyer-approved contracts on no legal budget which can be tailored to suit your circumstances in a safe and controlled way. View our contract suite or sign up for free today.