Are you considering going self-employed? Starting your own business can be a challenging feat, but it's gratifying. A lot of work goes into working for yourself, but it's a good feeling knowing you're building your vision to bring you success.
A person becomes self-employed for several reasons, like wanting to be their own boss and deciding how and when they work. Working for yourself allows room for creative freedom.
Self-employed people gain better job satisfaction because they're usually passionate about their work, allowing them to create a positive home and work balance. Having the option to choose who you work with can be empowering, and you create your own work environment that you strive in.
You may have already started trading as self-employed, but you may wonder when is the right time to register as self-employed with HMRC.
In this article, you'll learn all about what it means to be self-employed when you need to register as self-employed, and we'll tell you how to register.
What Does Being Self-Employed Mean?
Self-employment means you work for yourself.
If you come across the phrase sole trader, it is the same as being self-employed. Being self-employed means you run your own business and are responsible for its success or failure.
If you're self-employed, you'll have all of the following responsibilities:
- You have to cover the cost of your business.
- Keep accurate records of business expenses and income.
- File for an annual self-assessment.
- Pay income tax and National Insurance contributions to HMRC.
Being self-employed has many benefits, firstly having more control of your work day and working hours. You may be wondering if you need to register as self-employed, but if you earn money by doing any of the following, then you are self-employed:
- Give quotes or bids to get work: If you're quoting potential clients or people for your services, then you're classed as self-employed. If you're working in a business but doing freelance work on the side, this also counts as being self-employed.
- You're your own boss: If you're not under direct supervision when working and you control your hours and workloads, this falls under being self-employed.
- You pay your own tax: If you pay your National Insurance and other taxes, you're self-employed. If you're self-employed and haven't been doing this, you should start,
- You don't get paid when you don't work: If you don't get holiday or sick pay when you're not working.
- You operate under a contract: If someone contracts you to do work for them but not be employed by them, then you're what is known as an independent contractor.
As a sole trader, you're an independent contractor or sole proprietor. If any of the above apply, you must register as self-employed with HMRC.
When Should You Register as Self-Employed?
Ideally, you should register as self-employed at the earliest opportunity.
Legally, you must register by 5 October after the end of the tax year you became self-employed. When self-employed, you must complete an annual self-assessment tax return and register for Class 2 National Insurance.
If this is the first year of self-employment, you may not need to register if you're self-employed if you've earned less than £1,000. However, if you've earned above £1,000, you'll need to register. If you don't register with HMRC when required, you may face a fine of up to £100.
If you need clarification on whether you need to register, you can check on the Government website and answer a few questions about your employment. It will let you know if and when you need to register and start your self-assessment tax return.
How to Register as a Self-Employed
So, it is time to register as self-employed.
You'll be registered with HMRC online with the following steps. If you wish to inform HMRC of your self-employment over the phone or via post, you can find the details on the government website. The below steps will still be helpful to you as you'll find out what information you need to provide for your application.
1. Check if Being Self-Employed is Right for You
There is a lot of responsibility for self-employed individuals, mainly because it can be considered risky. To start trading as a sole trader, you're responsible for attracting clients and delivering services. Starting self-employment for the first time can be challenging, and there's a lot of pressure to make enough income to ensure working for yourself is worth it.
If your heart is set on working for yourself, but you're unsure about being a sole trader, there are other business structures open to you:
- Business partnership: There are benefits to a partnership business; they're easy to establish, start-up costs are low, and you'll have greater borrowing capacity. You can benefit from working for yourself without the sole responsibility of the business.
- Set up a limited company: Setting up a limited company is a great way to bring an idea to life; you can get lots of support for starting a business, such as grants and Government support. Shareholders typically own limited companies, and you can sell shares to your business to help it run. More bodies will be involved with a limited company so that you won't be completely solo. There are various funding options available if you're a limited company.
If you prefer the business structure of self-employed work, move on to the following steps.
2. Choose a Trading Name
You're going to need a sole trader business name. You can trade under your own name, which is quite common for freelancers, or choose another name for your business. If you decide to stick with your name, you don't need to register your name. However, you must register your business name if it's something else.
Sole trader names must not be offensive or include ‘limited', ‘Ltd'. ‘limited liability partnership, ‘LLP', ‘public limited company' or ‘plc'. If you need clarification on whether you can use certain words, check which words you may need permission to use.
You could be sued if you choose a name already registered trademark or currently used elsewhere. If you've come up with your new business name and want to protect it from being used by others, you should register it as a trademark.
3. Gather Records
As a self-employed person, you'll need to keep records of all your business expenses and income for your tax return. There are several accounting methods you can use to help you keep records of payments and business income:
- Traditional accounting: You record income and expenses by the date you invoiced.
- Cash basis accounting: Small business owners with an income of £150,000 tend to use the cash basis reporting method. So, you only record revenue or expenses when you receive money or pay a bill, which means you'll only pay Income tax on the money you've received.
You can hire someone to do your accounting or use an expense tracker app that allows you to control your finances, keep records and even scan receipts so all your information is digitised and ready for when you have to do the annual tax return.
You should keep a record of expenses right from the start of your self-employment so you're prepared for future Self-assessments.
4. Information Needed to Register Self-Employed with HMRC
To start paying taxes, you need to register for self-assessment. You'll need to provide some information and details during the registration process.
To simplify things, we've compiled a list of documentation you'll need for the self-assessment.
You'll need the following information:
- National Insurance number: You must apply if you don't have one. You'll also need this to register for the Class 2 National Insurance.
- Your ten-digit Unique Taxpayer Reference (UTR): You'll find your UTR in your personal tax account, on the HMRC app once you've logged in, and on any other tax documentation like tax returns from HMRC.
- Details of your untaxed income: Income from self-employment, interest on shares, and any dividends you may have.
- Expense records: Any expenses related to self-employment must be ready for the self-assessment.
- Previous tax records: Proof of what you've already paid tax on, so a p60 or any other documents relating to tax you've previously paid.
5. How to Register as Self-employed
You can register as a sole trader through your business tax account. You must complete a Self Assessment and Class 2 National Insurance. Registration is a straightforward process once you've got all the information you need.
You'll need a Government Gateway user ID and password to register through a business tax account. If you don't have a user ID, you can create a Government Gateway Account. You should receive your UTR in the post within 15 working days.
However, you'll get it digitally much sooner in your personal tax account or HMRC app. You may need to reactivate your existing account if you've registered for Self Assessment before but didn't send a tax return last year.
You must register separately from other sole traders if you work in the construction industry or are a self-employed fisherman. The Government and HMRC tax these two industries differently, so other processes are involved. Construction workers must register for the Construction Industry Scheme.
HMRC will reach out to you by email or posting, letting you know when to complete a self-assessment tax return before it's due. Once you've filled in your Self-assessment, you'll receive a self-assessment tax bill, which will include all the details of how much tax you need to pay.
Final Thoughts on Registering as Self-Employed
You can earn as self-employed without worrying about missing tax payments once you inform HMRC of your working situation.
If you decide later that you are no longer self-employed, you'll need to inform HMRC, send a final tax return for your tax year, and pay tax on what you earned in the year.
Registering self-employed if you sell goods or make more than £1,000 from providing services over a year is essential. Remember, filling in a self-assessment tax return is a legal requirement, and you'll be fined up to £100 if you don't correctly register as self-employed.
