24 June 2011. The tax and National Insurance contributions (NICs) you'll pay depend on whether you're self-employed or an employee – so it's important to check that you really are self-employed.
(If you are Romanian or Bulgarian, you will find a link to the rules regarding your specific case at the end of this article).
You qualify as self-employed if:
• you run your own business and take responsibility for its success or failure;
• you can decide how, when and where you do your work;
• you deal with more than one paying customer, or have the choice to do so;
• you are free to hire other people to do the work for you or help you at your own expense;
• you provide the main items of equipment to do your work;
• you have a ‘contract to provide services’ or a 'contract for services'
Any person engaged in self-employment must have registered their business activities with the HM Revenue & Customs and be able to show they are paying appropriate national insurance contributions.
Registering for tax
You must register as being self employed within 3 months of trading, or risk a fine from Her Majesty’s Revenue and Customs (HMRC). You can register online at www.hmrc.gov.uk or by calling 0845 915 4515. Both the website and the helpline can also give you guidance on special tax reliefs and allowances available to the self employed.
You will then be sent a Self Assessment tax return to complete each year (the tax year runs from 6th April to 5th April). This form collects details of your earnings and any other income you get, for example rental income if you own a property, or interest on a bank account, in order for HMRC to calculate how much income tax you must pay. The tax return must be submitted in time (this can be done online) or you risk facing a fine.
National Insurance contributions
(Figures given are correct for this tax year, 2011-12, but are liable to change each year. Please check with HMRC for the most recent rates)
If you're self-employed you normally have to pay Class 2 National Insurance contributions. If your annual profits are over a certain amount you also pay Class 4 contributions. In certain circumstances – for example if you earn less than £5,315 per year – you may be exempt from paying.
Class 2 National Insurance contributions are currently set at a rate of £2.50 a week. They count towards certain benefits, like the basic State Pension, Maternity Allowance and Bereavement Benefit. However any claims for benefits may be affected if your payments are late.
Class 2 contributions do not normally count towards the additional State Pension, Statutory Sick Pay or Jobseeker's Allowance, so you might want to think about making other arrangements like a personal pension and income protection insurance.
Class 4 contributions are determined by how much profit you earn in a year. You pay 9% on annual profits between £7,225 and £42,475 (2011-12) and 2% on any profit over that amount.
If you have more than one business, special rules apply for calculating adjustments to profits on which you pay Class 4 National Insurance contributions.
If you file your return online, your Class 4 National Insurance contributions will be worked out for you automatically. If you send in a paper tax return by 31 October following the end of the tax year and leave the space blank, HMRC will work out your contributions. You can work out your Class 4 contributions yourself by using the Class 4 calculator in the notes that come with your tax return supplement.
For further information, read National Insurance Contributions: a guide for 2011/2012 or can call the National Insurance Self-Employed Helpline on 0845 915 4655.
Benefits and tax credits
You may qualify for benefits or tax credits, in particular Working Tax Credit. The criteria by which Working Tax Credit is calculated and whether you qualify can be complicated and are beyond the scope of this article – we strongly recommend you speak to the Citizen’s Advice or an experienced tax advisor. In summary however, it consists of several elements, each with its own particular qualifying conditions, that are added together to give the total amount you can claim:
1. A basic element for anyone who qualifies for Working Tax Credit
2. A second adult element if you are claiming as part of a couple
3. A lone parent element if you are raising a child or children alone
4. A 30 hour element if you work more than 30 hours a week
5. A disability element if you are disabled
6. A 50 plus element if you are aged 50 or over
7. A childcare element
Registering for VAT
Each year the government sets a figure known as the VAT registration threshold, currently £73,000. If your turnover over the previous 12 months exceeds this, or you believe your turnover in the next 30 days alone will exceed this then you must register for VAT.
If you do not exceed the threshold then you may choose to register for VAT regardless. The main benefit is that you can claim VAT back on the supplies that you buy, which can be critical to cashflow for a new business. Almost as importantly, it can give the impression to potential customers and suppliers that you are bigger than actually are – indeed, some companies/people will only deal with entities that are VAT registered.
There is an online tool developed in conjunction with HMRC for helping you decide if you should register for VAT – When to Register for VAT.
Once registered for VAT you will have to file VAT returns every quarter. This is not as difficult as it sounds – all the VAT you have charged to customers during the period of the return are added together to give the the output tax; all the VAT you have paid to your suppliers is added together to give the input tax. The difference is then either paid by you to HMRC, or claimed as a repayment.
As with income tax self assessment, the VAT return can be done online.
Getting a business bank account
There are several reasons for opening a business bank account. From an accounting and tax perspective, you should keep your business finances separate from your personal ones, and from a business perspective, it looks much more professional when it comes to cheques and invoices.
Shop around as most banks offer special deals including free banking (for a limited number of months after you open your account).
It is also important that you have a good relationship with your bank manager, so try and find a bank that will allow you to form a lasting relationship with the same manager at the same branch. Then all other things being equal (such as the cost of running the account and key services provided), you should choose the bank where you feel the best ‘connection’ with the manager. Their goodwill may one day be vital in extending your overdraft just when you need it.
HAMILTON BRADY LTD
Tel: 0844 873 6081
E-mail: [email protected]
Address: Springfield House
Water Lane, Wilmslow, Cheshire, SK9 5BG
You should always seek advice from an appropriately qualified solicitor on any specific legal enquiry. For legal advice regarding your case, please contact Hamilton Brady for a Consultation with a Solicitor on 0844 873 608.