If you're planning to become self-employed you should read this brief guide to the tax implications of your new status.
There’s no official list of self-employed people in the UK. But that doesn’t mean you can disappear under the radar. The government may not be concerned about what you call yourself but they do care about the tax you owe.
According to the Office for National Statistics, in 2023 there are 30 million employees paying their tax at source through the Pay as You Earn (PAYE) scheme. If you disappear from PAYE, His Majesty’s Revenue and Customs (HMRC) will want to know where you’ve gone. You’ll need to assess your own tax liability.
This was introduced in 1995 and the UK's leading tax advisers Ernst and Young described it as “the biggest change there has ever been to the tax system of this country since the introduction of Income Tax in 1803".
Before then, the self-employed were taxed each year on the basis of the previous year’s profit with the Inland Revenue making the calculations and issuing demands. The new system promised to cut government costs (including 3,000 jobs) – which it did - and make life easier for everyone – which it didn’t. Originally, the initials ‘SA’ actually stood for ‘simplified assessing’ but the government realised this was pushing the limits of reality so the name was changed.
Some employees are on self-assessment, particularly those with complicated tax affairs or earnings outside the reach of PAYE. However, the vast majority of people required to self-assess are the self-employed.
So, while you can’t register as ‘self-employed’ you’re legally obliged to register for self-assessment and Class 2 National Insurance.
You do this on the government website. Open an account to get a Government Gateway user ID and password. You’ll then get a Unique Taxpayer Reference (UTR) which identifies you in your dealings with HMRC.
Once you’re registered you’ll get a letter or email - to tell you when your self-assessment is due. These reminders usually go out very early, in April or May. Log into your account, fill in the online self-assessment form and submit it. You’ll get confirmation that HMRC have received it and your tax account will be updated to show what you owe. It’s your responsibility to pay the amount owing on time.
The tax year runs from 6th April to 5th April and the deadline for submitting your return is 31st January following the end of the tax year. For example, your return for 6th April 2022 to 5th April 2023 needs to reach HMRC by 31st January 2024.
When you register you’ll need to give HMRC:
- Your business name and description
- Self-employment start date
- Email address
- National Insurance Number
- Personal details
There’s a £1,000 threshold you have to exceed before you need to self-assess, which gives you a small breathing space to start your business before registering.
In any case, don’t panic about this. You don’t have to register as soon as you start working for yourself. You have until 5th October to register in the tax year when you went self-employed. As the tax year starts on 6thApril that gives you six months.
You might be surprised how many things are classed as allowable expenses. They include:
- Office supplies like stationery and broadband
- Office equipment like computers and software
- Business premises like rent, maintenance and utilities
- Transport and travel costs
- Third-party professional services like accounting
- Raw materials and stock
- Marketing
- Insurance
- Essential special clothing
- Membership of professional bodies and trade magazine subscriptions
If you’re self-employed you can operate as many separate businesses as you like although the self-assessment form only has space for five. You don’t have to register each one individually, you simply have to be registered yourself. You then complete a different section for each business in your self-assessment return.
If you’re self-employed in partnership then you, one of your partners or a third-party agent must submit a partnership tax return showing the total taxable profits of the partnership and the share of those profits allocated to each partner. You then report your share in your own self-assessment return.
Submitting a partnership return is different from personal self-assessment because currently it’s not possible to do this directly on the HMRC website. Instead you’ll need to buy software which enables you to create and submit your return. The HMRC site carries a long list of commercial software providers.
