Registering with HMRC

You must register with HMRC within the first three full months of commencing self employment. Failure to register may result in a penalty.

If you start working for yourself you become liable for class 2 national insurance contributions and must notify HMRC by 31 January after the end of the tax year in which the self employment commenced.

Once you become self-employed, the tax rules are quite different from those that may have applied when you were an employee. Instead of tax (and national insurance) being deducted from your earnings at source, you must be prepared to receive a bill at some time in the future. This can be an unwelcome surprise if you haven't put enough money aside.

What profits do HMRC tax?

The starting point for the calculation of taxable profits is your profit and loss account. In calculating taxable profits you are entitled to claim deductions from your business income in respect of any expenses incurred for the purposes of trade (with a few minor exceptions).

When you buy equipment or motor vehicles, you will be entitled to deduct a proportion of the cost each year you own them and use them in your business. Claims for such capital expenditure are known as capital allowances.

Tax is payable on the whole of the profits of a trade, and so payments for your own 'wages' (drawings) are not deductible. However, if your spouse works in the business, the wages are an allowable deduction, provided they are actually paid and are a reasonable reward for what is done

What about national insurance?

The self-employed are subject to a two-tier system of national insurance contributions. Class 2 contributions are at a flat rate of £2.40 per week, payable against a quarterly bill or by direct debit from your bank account, if earnings exceed £5,075 per annum.

Profits between £5,715 and £43,875 are subject to Class 4 contributions at a rate of 8%. Profits in excess of £43,875 are liable to Class 4 contributions at the rate of 1% without any upper limit. Class 4 contributions are collected by HM Revenue & Customs and are payable at the same time as the instalments of income tax.

If you do not register your liability to class 2 National Insurance your liability will be up to a maximum of 100% of the lost contributions for a deliberate failure; concealed failure 70% and all other cases the penalty is 30%. There will be no penalty if there is a reasonable excuse for the failure to notify.

The information provided is for general information only, intended for UK readers and may be subject to change. Professional advice should always be taken before taking any action.