A guide on Tax and National Insurance when you’re self-employed

If you are thinking of setting up your own business and becoming self-employed then the quickest and easiest way to do this is to become a sole trader.

Self-employment gives you the freedom to run your own business, earn your own income and be your own boss. However, there are things you need to know about tax and national insurance if you are becoming a self-employed sole trader.

In this blog we cover all you need to know about becoming self-employed as a sole trader from registering with HMRC, to the tax and national insurance requirements to ensure you stay compliant with HMRC and pay the right amount of tax.

What is a sole trader?

HMRCs definition of a self-employed sole trader is as follows:

You’re self-employed if you run your own business as an individual and work for yourself. This is also known as being a ‘sole trader’.

You can keep all your business’s profits after you’ve paid tax on them. You’re personally responsible for any losses your business makes. You must also follow certain rules on running and naming your business.

Getting started as a self-employed sole trader

When you decide to start your own business and become self-employed, there are a number of things you should do as follows:

• Register as self-employed with HMRC for self-assessment tax returns.
• Open a separate bank account to keep your finances separate (advised but not necessary as a sole trader).
• Work out if you need to register for VAT.
• Register for PAYE if hiring staff/employees.
• Keep accurate financial records.
• Get proper insurance.

Setting up as a sole trader

You need to set up as a sole trader if any of the following apply:

• you earned more than £1,000 from self-employment in a tax year (for example - 6 April 2022 and 5 April 2023)
• you need to prove you’re self-employed, for example to claim Tax-Free Childcare
• you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits

Registering as self-employed

If youre self-employed, you may need to set up as a sole trader.

As a sole trader, youre required to register with HMRC by completing the registration form online via HMRC or send a printed and filled form to the address indicated on the form or register by calling HMRC on 0300 200 3310.

Read more about how to register as a sole trader here.

Registering for self-assessment tax returns

You must register with HMRC by 5th October following the end of the tax year (6 April to 5 April) if you’re self-employed as a ‘sole trader’ and earned more than £1,000 before tax relief in the tax year .

You will be required to register for both:

• Self-assessment
• Class 2 National Insurance

How you register for self-assessment will depend on if you have sent tax returns previously to HMRC.

If you have not filed a tax return before

• Register for Self-assessment and Class 2 National Insurance through your business tax account. You’ll need a Government Gateway user ID and password to sign in. If you do not have a user ID for a business tax account, you’ll be able to create one.
• You’ll receive a letter with your Unique Taxpayer Reference (UTR) number within 10 days (21 if you’re abroad). You’ll need your UTR to file a return.
• You’ll receive a reminder letter or email telling you to complete a Self-assessment tax return before it’s due.

You can file your tax return any time before the deadline.

If you’ve filed a tax return online before

• Re-register online (form CWF1) for Self-assessment and Class 2 National Insurance if you’ve filed a return before but did not file one last year.
• You’ll need your 10-digit Unique Taxpayer Reference (UTR) from when you registered before. You can find your UTR if you do not know it.
• You’ll receive a reminder letter or email telling you to complete a Self-assessment tax return before it’s due.

Register with HMRC online or by post

Most people these days will register for Self-assessment tax returns online, but you can still register by post by filling out the form on screen and printing it out, but we wouldnt advise this method.

Filing your self-assessment tax return

Self-employment tax is more complex than when you are an employee. If you are self-employed, you must file an annual tax return on which you must disclose your taxable income and capital gains and claim any applicable exemptions and reliefs.

We would recommend getting an accountant such as dns accountants to complete your Self-assessment tax return as they will be able to advise you on where to make tax savings and make an accurate tax calculation on your behalf.

Records you must keep

In order to calculate tax you owe and for the purposes of HMRC, you must keep accurate records as follows:

Sales and income information – This includes your invoices, bank statements and paying-in slips.

Business expenses – If you are claiming business expenses then you will need to securely store all self-employed receipts related to such expenditure, plus any invoices that qualify for expenses.

Claiming business expenses

HMRC insists that you declare all income but what you claim as expenses is up to you within rules set by HMRC as what qualifies as business expenses.

You can claim anything as an expense which is used "wholly and exclusively" for business purposes. What you claim must be justifiable as being for business and must not include any private element. Here are the main categories of expenses you may consider claiming:

• office costs, for example stationery or phone bills
• travel costs, for example fuel, parking, train or bus fares
• clothing expenses, for example uniforms
• staff costs, for example salaries or subcontractor costs
• things you buy to sell on, for example stock or raw materials
• financial costs, for example insurance or bank charges
• costs of your business premises, for example heating, lighting, business rates
• advertising or marketing, for example website costs
• training courses related to your business, for example refresher courses

Find out more about what business expenses you can claim as a sole trader here.

Tax & self-employed national insurance 2023 / 24 tax year

Income tax

How much income tax you pay in each tax year depends on:

• how much of your income is above your Personal Allowance
• how much of your income falls within each tax band

Personal allowance

The standard tax free Personal Allowance is £12,570, which is the amount of income you do not have to pay tax on.

Your Personal Allowance may be bigger if you claim Marriage Allowance or Blind Person’s Allowance. It’s smaller if your income is over £100,000.

Income tax rates and bands

Below are income tax rates and bands for tax year 2023/24

• Band Taxable income Tax rate
• Personal Allowance Up to £12,570 0%
• Basic rate £12,571 to £50,270 20%
• Higher rate Higher rate £50,271 to £125,140 40%
• Additional rate Additional rate over £125,140 45%

National insurance contributions

If you’re self-employed and your profits are £12,570 or more a year, you usually pay Class 2 and Class 4 National Insurance rates.

How much national insurance you pay

• Class Rate for tax year 2023 to 2024
• Class 2 £3.45 a week
• Class 4 9% on profits between £12,570 and £50,270
• 2% on profits over £50,270

How to pay national insurance?

Most people pay Class 2 and Class 4 National Insurance through Self-assessment.

Who has to pay National Insurance contributions?

You pay mandatory National Insurance if youre:

• 16 or over and are either:
• self-employed and making a profit of more than £12,570 a year.

When do I pay income tax on my self-employed profits?

You need to pay the tax you owe by midnight 31 January 2024.

There’s usually a second payment deadline of 31 July if you make advance payments towards your bill (known as‘payments on account’).

You’ll usually pay a penalty if you’re late. You can appeal against a penalty if you have a reasonable excuse.

Who calculates the amount of income tax I owe?

If you hire a professional accountant to complete your self-assessment tax return, your accountant will complete a calculation and let you know how much tax you owe, based on the information youve provided to them.

If you submit your tax return online or yourself, HMRC’s online system will calculate your tax automatically, and you can view the calculation online or print it out.

If you submit your tax return on paper, HMRC normally calculate your tax for you and tell you how much.

However, bear in mind it is easy to make a mistake on a tax return and therefore the wrong amount of tax can easily be calculated, so hiring an accountant to complete your tax return for you is highly advised.

I expect my income tax bill to be less this year than last year. What can I do?

if you know for certain that your tax bill will be lower than the previous year, you can request that HMRC reduce payments on account. However, be careful not to reduce your payments on account by too much as HMRC can charge you interest and penalties for underpaying.

VAT

You must register for VAT if your turnover is over £85,000. You can register voluntarily if it suits your business, for example if you sell to other VAT-registered businesses and want to reclaim the VAT.

Tax tips for sole traders

• Make sure you have claimed all your business expenses, even if it takes you into losses this year.
• Remember to claim start-up costs (costs incurred before the first sale and for setting up the business).
• Keep records of everything.
• Employ an accountant to complete your self-assessment tax return each year and to give you tax advice.
• Employ family members to work in your business.
• Share your assets/income to use spouse allowances.
• Apply for married couples allowance transfer if your spouse has little income and you are not a higher rate tax payer.
• Make pension contributions.
• Pay your tax on time to avoid penalties.
• Claim working tax credits.
• Claim child tax credits if your family earns below £60,000 .
• Make regular gifts now, out of your ordinary income to reduce IHT liability.
• Invest in EIS and VCTs and claim higher rate tax reliefs.
• Claim the extra relief for paying into pensions or making gift aid donations.
• Consider incorporating as a limited company for additional tax benefits.

Summary

Becoming self-employed and trading as a sole trader can be exciting and daunting all at the same time. There is a lot to think about around tax and national insurance and there are key decisions to make before you stop full-time employment.

Here at dns accountants we can help with every step of the process when becoming self-employed including:

• registering you for self-assessment tax returns
• advice on tax and national insurance contributions and rates
• advice on income tax rates and requirements
• employment status
• self-employed income
• claiming expenses
• business profits
• paying tax
• registering you for VAT

Call us today on 03300 886 686 or e-mail us at enquiry@dnsaccountants.co.uk for more information on self-employment tax and national insurance.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.