If you want to be your own boss then self-employment should be your go to option. There are many advantages which make this venture enticing for many professionals. First of all, you can enjoy flexible working hours which means you can work around other commitments as well, thus creating a healthy balance. Secondly you can experience working on different projects at the same time for various clients and you can charge competitive salaries for the same as day rates for the self-employed are higher. Lastly you have the freedom to work from home or your own business premises which saves a lot on commuting costs.
If you have decided to start a business and don’t know where to start, then here is the process to help you. Before making the leap forward, there are some preliminary aspects you will have to complete. The first of these is registering as self-employed with HMRC and in most cases, as a sole trader.
- First you will have to get a Government Gateway account. This will give you access to the government’s collection of online services, the most important of which is HMRC’s Self -Assessment portal. The details of your account will be sent by post and you will have 90 days to use your login details for the first time. You will be required to give basic information about yourself and your business, including contact details and the nature of your business. You will also have to decide on a name for the business, provided the name you choose has not been adopted by any existing businesses.
- There is a time limit for the registration process. You will be legally obliged to register by 5th October of your business’s second trading year. If you do not register before this deadline, you are likely to be heavily taxed.
- You don’t necessarily have to register as a sole trader. If you work for yourself, then you are probably a sole trader and should register as one. However, if you are in a partnership, you have to register as self-employed but not as a sole trader. Instead you have to register as a partner. If you are setting up a limited company, then you will be identified as both owner and employee of the company. Your Tax and Insurance calculation will become different.
- After you have registered, there are some key legal obligations you have to keep in mind. The most important of this is that you have to keep well-documented records of all business activities. By 31st January of every year you have to file your Self-Assessment Tax return. You will have to make payments to HMRC by 31st January and 3rd July of every year. Any default on such payments should be sought with the approval of the HMRC. Along with Income tax, you will have to pay National Insurance.
All the advantages are very enticing indeed. However there are many responsibilities that weigh down in the registration process and many challenges are encountered on the way. You will have to find work, decipher expenses, catalogue cash flow and file your own taxes.
The moment you start working for yourself, HMRC will consider you self-employed. HMRC will consider your business to be active on the day you:
- Begin to market your business
- You have enough goods and services to sell and acquire a customer base.
Failure to register within 3 months of beginning your enterprise will earn you a fine of 100 GBP. If you continue to delay your fine could swell as much as 1600 GBP.
Registration has its unique benefits:
- You can avoid hefty fines and registering with HMRC automatically sets up your online account, enabling you to send tax returns online, check payment due dates and register for other applicable business taxes such as Value Added Taxes.
- HMRC will furnish you with a unique Taxpayer reference number. This ten digit number is used to get in touch with HMRC.
Some additional responsibilities you will have to face are:
- You will be responsible for filling out your own National Insurance Contributions along with your tax returns.
- Paying into your own Class 2 NIC counts towards benefits such as basic state pension, employment and support allowance and maternity allowance fund.
- Since class 2 NIC is compulsory and due from the day your self-employment begins, your class 2 NIC can be paid into weekly, monthly and biannually in June, July and July. This fee can be paid through Direct Debit, online and telephone banking, at a bank or building society, at the post office and by cheque through the post.
- You can be exempt from Class 2 NIC payments if you are under 16 years of age, are a married woman or widow under Certificate of Reduced rate election or if your earnings are well below a certain amount.
- Class 4 NIC’s are based on your profits for the fiscal year and are compulsory if your earnings are above a certain amount which is currently 8060 pounds. It is not a flat rate but is based on a percentage of your taxable profits and is changeable every year. It is automatically calculated when paying online.
All of this is meant to stress on the importance of registering with the HMRC. It sounds like a tedious process but is actually quite simple and painless. Except for items such as expense reports, the major paperwork will be more or less done with. There are no company formation costs to worry about and the first step to self-employment is complete after registering with HMRC.