Ultimate Guide on HMRC Self Employed Business Tax
An individual who starts working independently is termed as a Self Employed or sole trader. The definition doesn’t change even if the individual has not informed the HM Revenue and Customs (HMRC) about the same. A Self Employed must register with HMRC and abide by the rules for HMRC self-employment business tax and National Insurance. Apart from operating as a Self Employed, an individual can either turn into a partner in a business partnership or form a limited company. Once operating through a limited company, an individual is both an owner and an employee of the company and hence, there are different HMRC Business taxation rules and National Insurance contributions.
HMRC Register as Self Employed
The major advantage of working as a sole trader or a self employed individual is the ease of operating and managing the business. Once an individual starts operating as a sole trader or through a business partnership, he/she becomes accountable for paying the HMRC Self Employed income tax and National Insurance (NI) on their own or through a small business accounting and taxation consultant like DNS Accountants. The business can register with HMRC anytime upto 5 October, from the second tax year of the business. A tax year is from 6 April to 5 April. For example, if an individual starts a new business as a self employed or a sole trader in March 2016, the individual must register with HMRC as a self employed until 5 October. However, if the first self employment work is undertaken in May 2016, an individual need to register as a sole trader with HMRC until 5 October 2017.
Also, once an individual starts operating as a sole trader or self employed, it becomes imperative to complete a self assessment tax return each year and pay the National insurance (NI) contribution. Registering with the HMRC is a fairly simple process and there is very little paperwork involved and a sole trader does not have to pay any company formation cost. However, a sole trader needs to formally register with HMRC, and assume responsibility to pay his/her income tax and National Insurance liabilities.
Also, as a sole trader the business owner needs to pay Class 2 National Insurance contributions (NIC) on the income. For the tax year 2016-2017, the NIC is £2.80 a week. But, if the business has a profit of less than £5,965 a year for the tax year 2016-2017, the business is not required to make these NI contributions. For the tax year 2016-2017, 9% of the annual profit ranging between £8,060 and £43,000, and 2% of profit above £43,000, must be paid as Class 4 National Insurance contributions.
Is Value Added Tax (VAT) Registration Required?
As of April 2016, a business is required to register for Value added tax (VAT) if the annual turnover is £83,000 or more. During the financial year, if the owner feels that this annual threshold will be hit, the business still can register for VAT. But it is important to inform the HMRC within 30 days, or the business is at a risk of paying a fine. As a safer option, businesses might decide to register for a VAT number even if it is not required at present. A sole trader may get more credibility if there is a VAT number, and the business will be able to claim the VAT refund on eligible purchases made. Our accountants at DNS are very knowledgeable and will be able to able to advise sole traders or self employed professional if they are better of adopting a Flat rate VAT scheme or a standard VAT scheme.
Having a Bank Account for the Business
As a sole trader, even though the business income will be taxed along with the personal tax, it is imperative to keep the business accounts and finances separate from the personal affairs. As professional accountants, DNS advice our clients to maintain a separate business bank account as it makes account management simpler and looks more professional to have the business name mentioned on the invoices, and cheques. Another added advantage of having a bank account is that the business can earn some amount of interest on the bank account balance.
As per the law there are certain insurance policies that a business needs to have in place. The type of insurance cover depends a lot on the business type and the industry sector a sole trader carters to. If a sole trader decides to hire another staff, it becomes mandatory to take out an employer’s liability insurance. A sole trader will be required to cover at least £5 million and must display the certificate of insurance where it is visible to the employees and is easy to read. Self employed professionals or sole traders can expect a very heavy fine failing to abide by the rules and policy guidelines.
Most owner-managed-businesses opt for public liability insurance. This protects the business if any third party injures oneself, or if any damage happens at the property because of any business activity. For sole traders offering professional services to their clients, they should opt for getting cover for professional indemnity. This will cover the sole traders if any client sues them in case the client is not happy with the services provided.
Bookkeeping and Updated Financial Reports
For a sole trader to be successful in the business it is crucial that all the books of accounts are well maintained and updated with accurate information. If the paperwork is organized and constantly updated, it becomes easier for the business to meet its current obligations and also, the tax returns are filed on time avoiding any penalties. DNS Accountants can help sole traders with filing the tax return and completing the self-assessment tax return. Nowadays, many small businesses are using online accounting systems like Nomisma Solution to help simplify the accounts management and financial record keeping.
HMRC Self Employed Helpline
If an individual decided to work for oneself or if someone is operating as a sole trader, he/she can even speak to the HMRC if they need any guidance for various process. To get advice, the self employed helpline number is 0844-453-0165. The helpline operates, Monday to Friday, from 8 am to 8 pm, and on a Saturday from 8 am to 4 pm. The helpline can provide the following information on self-employment:
- Registering for a new business
- Filing a tax return
- Claiming a NI refund
- Construction Industry Scheme and many more
HMRC REGISTERING AS SELF EMPLOYED
Upon registration, a sole trader needs to provide the following information:
- Business name
- Business address
- National Insurance (NI) number
- Birth date
- Contact details including telephone, and email address
- Type of business
- Beginning date of self-employment
- Sole trader’s Unique Tax Reference (UTR)
- Business UTR
- If applicable, details about business partners
HMRC Self Employed Tax Return
|Date of tax return to be filed||Deadline for paper return||Deadline for return when HMRC will calculate tax||Deadline for return online|
|On or before 31 July||31 October||31 October||31 January|
|1 – 31 August||3 months from date of notice||31 October||31 January|
|1 September to 31 October||3 months from date of notice||2 months from date of notice||31 January|
|After 31 October||3 months from date of notice||2 months from date of notice||3 months from date of notice|
Your Accounting Partner – DNS ACCOUNTANTS
DNS Accountants is a skillful team of accounting and taxation professionals that helps clients with services ranging from self assessment to business set-up. The firm helps owner managed small business and private individuals across the United Kingdom. DNS is an acknowledged firm of ACA’s or Chartered Accountants (CA) and the firm takes pride in saying that we are very helpful to our clients & deliver unparalleled client service and persistently help clients to handle their wealth. The firm’s learned team focuses on helping sole traders with business registration, tax filings and other services such as self-assessment, payroll management and bookkeeping. At DNS, we are constantly in touch with our clients and offer
- Fixed price service
- Consistent and transparent service
- Certainty on tax base and taxation advisory
DNS Accountants offers taxation & accounting services to owner-managed-businesses or self employed individuals / freelancers / contractors. For business owners and freelancers / contractors, it is difficult to keep pace with the ever changing government regulations and rules. Our expert team of chartered accountants and taxation professionals help clients in services ranging from bookkeeping to payroll to tax planning, and filing tax returns. DNS Accountants help clients focus on maximizing their wealth.