If you decide to become self-employed, either on your own (as a sole trader), or with other people (as a partnership), you will be responsible for working out and paying your tax liabilities to HMRC.
Unlike limited company taxation (where the company itself, and its owners are distinct entities), the personal and business financial affairs of the self-employed are treated as a single entity for tax purposes.
If you’ve decided to start working for yourself, one of your first responsibilities as a business owner is to register for Self Assessment with HMRC.
To register online, you’ll need your National Insurance number, personal and business details (e.g. address, and the date you started the business).
Once you’re registered, you’ll receive your own UTR (Unique Taxpayer Reference number), which you’ll need when you submit your first annual tax return.
When you register for Self Assessment for the first time, you’ll also set up a Government Gateway account, so you can submit your return online.
Your Self Assessment Tax Return (SATR) provides details of your business turnover, and any expenses you’ve incurred.
If you’re working as a partnership, you will need to submit a separate tax return for the partnership itself.
You must submit your SATR by 31st October (if you’re sending in a paper return), or by 31st January if you’re using the online service.
If you file online, HMRC will let you know how much tax you owe. If you’re filing a paper return, you (or your accountant) will need to make the calculations.
The deadline for paying any income tax you owe is also 31st January.
If you’re late submitting your SATR, or paying any tax you owe, you will have to pay penalties and interest.
Unlike limited company directors, who pay Class 1 National Insurance Contributions (NICs), sole traders pay Class 2 and Class 4 NICs.
Class 2 NICs are payable via direct debit, whereas Class 4 NICs apply to your annual income and are collected via Self-Assessment.
Class 2 NICs are £2.75 per week (2014-15 tax year), assuming your annual profits are £5,885 or more.
If your annual income falls below this threshold, you won’t need to pay Class 2 NICs, but must contact HMRC to apply for an exemption.
You can register for Class 2 NICs, when first register as a new business with HMRC.
Class 4 NIC rates are levied at 9% of profits between £7,956 and £41,865 per year, and 2% on profits above £41,865.
You pay any Class 4 liabilities you owe via your annual tax return, alongside your income tax.
Value Added Tax
You must register your business for VAT if your turnover has reached the prevailing threshold (£81,000 for the 2014/15 tax year) within the previous 12 months, or if you expect to breach the threshold within the next 30 days.
As a VAT-registered business, you will be effectively collecting tax on behalf of HMRC, and must charge VAT to your customers once you’re registered.
One benefit of being VAT registered is that you’ll be able to reclaim any VAT you’ve been charged on your own business purchases.
The Flat Rate scheme is a simpler way of accounting to VAT.
What if you employ staff?
If you take on staff, you will also be responsible for calculating and deducting PAYE (income tax) and NICs from their wages.
You will be responsible for running a payroll for your business, paying any tax liabilities, and submitting information to HMRC.
You will also have to pay Employers’ Class 1 NICs on the wages you pay to your employees (above the prevailing threshold).