If you run your own business and are responsible for its success, you are classed as self-employed. You therefore need to register your self-employed status with HMRC within the first two years of your business. (https://www.gov.uk/new-business-register-for-tax)
Once you’ve registered your business with HMRC, you will then be posted an activation code for the Government Gateway website, enabling you to fill out your Self-Assessment (SE) tax return online each year. This usually covers the tax year (6th April – 5th April).
Please be aware this blog post has been written to give you a basic overview – I am NOT a financial expert so, if you have any questions or would like to clarify anything, please refer to either your accountant/bookkeeper or the HMRC website!
The financial responsibilities of being self employed
Once you’ve registered as self-employed, there are several financial responsibilities you need to be aware of. As these financial responsibilities are based on your business profits, you need to make sure you are claiming all of the expenses you are legally entitled to claim, as this will lower your overall profit figures. You can find out more about the expenses covered, by checking out the HMRC website.
#1: Tax
You will be liable to pay tax on your profits (not your earnings), if they are over your personal allowance, which is currently set at £10,600. When you fill out your tax return it will advise you how much tax you are liable for.
If you have profit over your personal allowance, you will need to pay 20% tax on that profit, if it is between £0 – £31,785, and 40% if it’s over £31,786 – £150,000. You can pay it in two payments – 31st January and 31st July (This is explained more on the HMRC website here).
#2: National Insurance (NI)
There are two National Insurance rates that you need to be aware of.
Class 2 NI: If your profits are £5,965 or more in a tax year, you will be liable to pay NICs at a flat rate of £2.80 a week.
Class 4 NI is payable if your profits are £8,060 or more in a tax year. Class 4 NICs are paid at a rate of 9% for profits between £8,060 – £42,385 and 2% if your profits are over £42,385.
When you fill out your Self-Assessment you will be advised how much National Insurance you need to pay. You can find out more about National Insurance Contributions here.
#3: VAT
Finally, we come to Value Added Tax. If your turnover exceeds £82,000 you will be liable to pay VAT, at a rate of 20% – and you MUST register within 30 days of reaching that threshold. You can register for VAT online and, once registered, you’ll be sent a VAT registration certificate that will have your VAT number on it, as well as when you need to submit your VAT return and payment and the date you became effective to pay.
Once you’re registered for VAT you MUST charge the right amount of VAT, as well as keeping accurate VAT records and pay any VAT you owe. You therefore need to increase your prices to reflect the right VAT amount and ensure all your invoices show the VAT added.
You can also register voluntarily for VAT. This is beneficial if you sell to other VAT registered companies and wish to claim the VAT back, but remember, you will then be liable to pay VAT yourself! You can check out the registration process here.
I hope this blog post has given you an overview of the financial side of your business. If you need any help with your company finances or would like further information on tax and National Insurance, please either speak to your bookkeeper/accountant or check out the government website.