Thinking of setting up your own business or considering self-employment?
Follow HM Revenue and Customs’ simple, 10-step guide to setting up as a sole trader.
1. Getting started: registering as self-employed
If you are newly self-employed, or are just starting up your own business you will need to let HM Revenue and Customs (HMRC) know by registering for business taxes.
You'll be asked for information about yourself and your business/ self employment. HMRC will then set up tax records for you using the information you provide.
You will need to have the following to hand:
- Your National Insurance number. In most cases you'll already have this, but if you haven't worked in the United Kingdom before you'll need to get one.
- Your contact details (and the contact details of your business if you've started self-employment)
- The date your circumstances changed
- PAYE information if you have people working for you
2. Registering for Self Assessment online
A Self Assessment (SA) online account will be set up automatically for you at the point of registering as self employed. While filing online is not compulsory (paper returns are still acceptable), there are many advantages – including automatic calculations, faster processing and later deadlines.
3. Receiving your Unique Tax Reference number
Once you've registered for Self Assessment, HMRC will set up your records and send you a letter with a 10-digit reference, called a Unique Taxpayer Reference (UTR).
You should keep your Unique Taxpayer Reference in a safe place as it will be needed for SA purposes and in all subsequent correspondence you may have with us.
4. Other considerations and changes to the IR35
If you're self-employed as a sole trader or a business partner, you'll usually need to arrange to pay your Class 2 National Insurance contributions straight away.
You will also need to ensure proper IR35 adherences. This legislation was introduced in 2000 as a way of combatting 'disguised employment'. Thus preventing contractors taking payment through their own limited company, while essentially working within an employment arrangement, as a means of avoiding tax.
You can be charged interest and penalties on any Income Tax or NICs owed if you’ve not applied the off-payroll working rules.
The IR35 is a complex regulation so you'll need to do your research. You can find out more here.
You may also need to register for VAT and the Construction Industry Scheme (see contacts below for more information).
5. Keeping a hold of your records
Once you’ve registered as self-employed, you will need to keep business records such as your accounts, evidence of tax that's been paid and other records relating to income and outgoings.
You'll need these to help you complete your tax return or to answer any questions from HMRC about a return you've completed. Important documents to retain include: cashbooks, invoices, mileage records, bank statements, receipts for purchases and your P60s if you are also employed. Records can be kept either on paper or computer. If done electronically, then keep a back-up. As a rule, records should be kept for a minimum of six years.
6. Keeping tabs on your expenses
If you're self-employed you usually have various running costs and expenses associated with your business. You can take these costs and expenses away from your business income to work out your profit, and produce accounts. You may also be able to get capital allowances for certain other costs, like machinery, which will also reduce your taxable profits. Common expenses you can claim for include: accountancy services, business bank charges, phone and internet charges, safety wear and utility costs for business use.
7. Sending your first tax return
If you are self-employed, you are responsible for paying your own tax and National Insurance (NI) contributions and must complete a Self Assessment tax form each year.
You'll get a letter, usually in April, telling you when you need to send your first tax return. HMRC might get in touch earlier if you need to send a tax return for a previous tax year. If you don't receive a letter or a tax return, you should contact HMRC.
8. Important deadlines for registering as self-employed
It's best if you register with HMRC as soon as your circumstances change. The latest you should register is by 5 October after the end of the tax year for which you need a tax return.
9. Important 2019 deadlines for tax returns
The first payment on account for the 2018/2019 tax year is due by 31 January 2019.
The tax year ends on 5 April and anyone who is required to file a tax return will receive a notice advising them to file a return for the tax year just ended. If you are newly self-employed, you need to register with the HMRC for tax and National Insurance for this to happen.
The second payment on account for the tax year ending the previous 5 April is due. For example, for the tax year 2018/2019, the second payment on account will be due 31 July 2019.
The self-employed will need to have registered with the HMRC for tax returns by this date.
If you are sending HMRC a paper tax return this must be submitted by the 31 October. If you send the form after this date there will be a penalty even if you have no tax to pay.
If you file your tax return online, you will need to submit it by this date if you have employment or pension income and want HMRC to collect the self-employed tax through your PAYE tax code.
Bear in mind that while there may be some exceptions to these deadlines, if your tax return or payment is late you will have to pay a penalty.
10. Filing subsequent returns
For the following year’s payments HMRC will estimate how much you owe based on the tax you paid in the first year. These estimates are split into two separate payments each year: on 31 January when you send in the previous year’s return, and 31 July. A further payment or a repayment may be due based on your final return for the year.
For further more information visit HMRC's website.