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How do you become self employed?
4 min read

How do you become self employed?

Becoming self-employed in the UK is an exciting venture, offering independence and the opportunity to turn your passion into a thriving business. Whether you’re just getting started, already in the midst of launching your business, this article will explore what it takes to register as self-employed, understand the tax implications, and provide practical tips for budgeting and planning.

What do I need to do when I first become self-employed?

When you’re first becoming self-employed, it’s essential to:

  • Validate your idea: If you’re in the early stages (minus 6 months to launch), begin by validating your business idea. Is there a demand for your product or service? Market research and competitor analysis are key.
  • Business plan: Create a comprehensive business plan that outlines your goals, target audience, and financial projections. This plan will serve as your roadmap to success.
  • Register as self-employed: To legally operate, you must register as self-employed with HMRC. This is a crucial step in the process, and you’ll receive a Unique Taxpayer Reference (UTR) for your tax-related activities.

What are the rules to be self-employed in the UK?

Understanding the rules of self-employment in the UK is critical for your success:

  • Legal structure: Determine the appropriate legal structure for your business, whether it’s a sole trader, limited company, or partnership. This decision impacts your liability and tax obligations.

  • Tax obligations: You must understand your tax obligations, including self-assessment, National Insurance contributions, and VAT registration if applicable. Self-employed individuals are responsible for both the employer and employee portions of National Insurance.

  • Registering with HMRC: One of the fundamental rules is registering as self-employed with HMRC. This is a legal requirement. When you register, you’ll receive a Unique Taxpayer Reference (UTR) for your tax-related activities. Keep in mind that failing to register can result in penalties.

By focusing on these key aspects of self-employment, you’ll ensure that you’re operating within the legal framework of the UK. Understanding your tax obligations and legal structure is essential for a smooth and compliant self-employment journey.

Do I have to inform HMRC if I become self-employed?

Informing HMRC about your self-employment status is mandatory. It involves:

  • Legal requirement: You must inform HMRC when you become self-employed. This is done by registering for self-assessment.
  • Deadlines: Be aware of registration deadlines to avoid penalties. Typically, you should register by October 5th of your business’s second tax year. Late registration can lead to fines and additional complications.

How much can I earn before declaring to HMRC?

Understanding the income thresholds and taxation is essential:

  • Tax thresholds: The tax-free allowance, known as the Personal Allowance, is £12,570 for the 2023/2024 tax year. You only need to declare income above this threshold. However, if you earn over £100,000, your tax-free allowance is gradually reduced by £1 for every £2 that your adjusted net income is above £100,000.
  • Tax bands: As your income increases, you’ll move through different tax bands. The standard tax bands are Basic Rate, Higher Rate, and Additional Rate. The rates within these bands can change from year to year.

For the tax year 2023/24 the tax bands are as follows:

Band Taxable income 21/22 Taxable income 22/23 Tax rate
Basic rate £12,570 to £50,270 £12,570 to £50,270 20%
Higher rate £50,270 to 150,000 £50,270 to 150,000 40%
Additional rate Over £150,000 Over £150,000 45%

There are different income tax rates for Scottish residents

To calculate your tax and National Insurance obligations, consider using a self employed tax calculator. For instance, if your net pay for the year is £30,000, and the Personal Allowance is £12,570, you’ll pay approximately £3,486 in Income Tax. Additionally, National Insurance payments will depend on your earnings, with Class 2 and Class 4 contributions.

What happens if I don’t tell HMRC I am self-employed?

Neglecting to inform HMRC about your self-employment can have serious consequences:

  • Penalties: Failing to inform HMRC about your self-employment can lead to penalties. It’s crucial to register and declare your income to avoid legal issues.
  • Legal consequences: Ignoring this obligation can result in fines and legal consequences, impacting your business and personal finances. HMRC may conduct investigations to assess your tax liability.

How much national insurance do I pay when self-employed?

National Insurance Contributions (NICs) are also paid by self-employed individuals:

  • Class 2 and Class 4 NICs: As a self-employed individual, you’re responsible for paying both Class 2 and Class 4 National Insurance Contributions. Class 2 is a flat rate of £3.45 per week, and Class 4 varies. You’ll pay 9% on profits between £12,570 and £50,270, and 2% thereafter.

For example, if your earnings exceed the Class 2 and Class 4 thresholds and your net pay for the year is £30,000, you’ll pay £179.00 in Class 2 National Insurance and £1,567.00 in Class 4 National Insurance.

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