HMRC self-employed business tax guide

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 person 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 self-employed business tax guide

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. The business can register with HMRC anytime up to 5 October, from the second tax year of the business. A tax year is from 6 April to 5 April.

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.


Self-employed national insurance rates

Also, as a sole trader the business owner needs to pay Class 2 National Insurance contributions (NIC) on the income. For the tax year 2023-2024, the NIC is £3.45 a week. But, if the business has a profit of less than £6,725 a year for the tax year 2023-2024, the business is not required to make these NI contributions. For the tax year 2023-2024, 9% of the annual profit ranging between £12,570 and £50,270, and 2% of profit above £50,270, must be paid as Class 4 National Insurance contributions.

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

Is value added tax (VAT) registration required?

As of April 2024, a business is required to register for Value added tax (VAT) if the annual turnover is £85,000 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 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 are very knowledgeable and will be able to advise sole traders or self employed professionals if they are better off 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, we advise 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.


Business insurance

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 caters 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 decides 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 processes. HMRC 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

  • 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 owners manage 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. We are constantly in touch with our clients and offer

  • Fixed price service
  • Consistent and transparent service
  • Certainty on tax base and taxation advisory

Other services

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.

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