Self-Employment & Tax

"I'd like to be my own boss. What tax rules do I need to be aware of if I set up as self-employed?"

Nick McBreen, Independent Financial Adviser, Worldwide Financial Planning Limited:

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You are very wise to ask the question before taking any action. There is a popular misconception out there that we can all simply set up one day as "self-employed" and everything will fall into place. Not so! Regarding income tax and national insurance the rules of self-employed are very different to the world of PAYE.

If you are setting up as a self-employed business then you should go online to www.hmrc.gov.uk or talk to your local tax office and confirm that the business/activity you are planning will in reality meet the criteria for being treated as "self-employment" and therefore taxable under Schedule D rules.

You should also check out www.direct.gov.uk to get the background on National Insurance rules.

Also plan how you are going to keep records and make returns for tax purposes - if in doubt arm yourself with a competent accountant and independent financial adviser now.

These questions should already have been raised as you completed your business plan - which of course you have done?

Paul White, Consultant, Belgravia Insurance Consultants:

The Tax Rules are similar to that of being employed, but with the added advantage of Deductible Business Expenses, which are "wholly and exclusively for business purposes".

You will need to register your new SE status with the HMRC, to arrange for the payment of National Insurance Contributions.

Where you trade from is also important, because if you work from home, you would need to account for telephone and so on separately from domestic use.

You might like to consider using a Book-Keeper for day-to-day Accounting or a Qualified Accountant to cover the more technical issues.

I wish you the very best of luck in your new venture!

Chas Roy-Chowdhury, head of taxation, the Association of Chartered Certified Accountants (ACCA):

I'd strongly advise you register with HMRC to be self employed as you still need to make National Insurance Contributions (NICs) and pay tax. The easiest way to do this is to call the HMRC Helpline for the Newly Self-Employed on 0845 9 15 45 15 . Or complete a form which can be found on their website www.hmrc.gov.uk/selfemployed and select 'register as self-employed'.

It is important to do this on time because if you delay telling HMRC about your new self-employed status, for three months or more, you may have to pay a penalty of £100.

HMRC will ask whether you are in partnership or a sole trader, and they will also ask for their details and their National Insurance Numbers. They will also ask about your VAT status and whether you need to be VAT registered. The taxman will want to know if you are over the VAT threshold. For instance, if your taxable turnover hits £67,000 a year (or you expect it to), you must register for VAT.

The government's Business Link website is very helpful and will help to explains some of the complex tax and employment rules about becoming self employed.

Related Links

Self-Employed? Cut Your Tax Bill

When An eBay Seller Must Pay Tax

Web Links

Worldwide Financial Planning: www.wwfp.net

ACCA: www.accaglobal.com

Business Link: www.businesslink.gov.uk

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