Tax and self-employment

If you're self-employed, you're responsible for paying your own tax and National Insurance contributions. If you've no idea where to start, read on.

Aaron discusses tax and money as a freelance dance instructor

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Hitting the dancefloor is both a passion and a profession for Aaron. But how do you manage all the paperwork and tax issues?

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"You're required by law to keep records of all relevant information, such as bills, invoices, bank statements and receipts for expenses."

I've just become self-employed. What should I do first?

It's important to let HM Revenue & Customs (HMRC) know you're self-employed as soon as possible. If you don't tell them within three months of the end of your first month in business you could face a fine.

How do I register?

Registering is easy. Just visit the HMRC website, or call the HMRC Newly Self-employed helpline on 0845 9154 515. It's open from 8am to 8pm, Monday to Friday, and from 8am to 4pm, Saturday and Sunday.

I've registered, now what?

Once you're registered as self-employed you'll have to fill in a tax return each year and give details of your earnings and any other income you make to find out how much tax you have to pay.

You'll be asked for details about profits from your business and any other income, such as from rental property and savings. This is used to work out how much tax and National Insurance you have to pay. You must provide the correct information and get it to HMRC on time.

What records should I keep?

You're required by law to keep records of all relevant information, such as bills, invoices, bank statements and receipts for expenses. The more records you keep, the easier it will be when it comes to filing your tax return.

You may find that it comes in handy to employ an accountant. You can find a chartered accountant by visiting the Institute of Chartered Accountants. Hiring an accountant can be costly but their fees can be claimed back against tax.

How long do I need to keep these records for?

You must by law keep business records for at least five years and 10 months after the end of the tax year the records relate to.

How do I know what National Insurance contributions to pay?

You will have to pay Class 2 National Insurance contributions at a flat rate of £2.40 a week (2009–2010) if you earn over £5075 per year (in total, not just from your self-employed work). These count towards certain benefits, e.g. the state pension, bereavement benefit and maternity leave. It's up to you how you make payments, either quarterly or by monthly direct debit.

Keep in mind that the Class 2 National Insurance contributions don't count towards the additional state pension, Jobseeker's Allowance or statutory sick pay, so consider making other arrangements, like a personal pension and income protection insurance.

What if I earn less than £5075?

If you earn less than £5075 per year you can apply for a certificate of small earnings exception and not pay Class 2 National Insurance contributions. However, you might decide to carry on paying them voluntarily to keep your entitlement to the state pension and other benefits.

Do I need to register for Value Added Tax (VAT)?

If you supply goods and services whose value is above £60,000, then you must register straightaway for Value Added Tax (VAT) and pay this throughout the year at fixed intervals. If you don't, you risk getting fined, which increases in size the longer the tax is unpaid. There are different rates of VAT which apply to a variety of goods, services and situations.

Depending on your circumstances, you might gain some tax advantages by voluntarily registering, even if your turnover is below the threshold.

What are the tax deadlines?

There are four key deadlines for sending in your tax return and paying any tax due:

31 October: The deadline for sending in the majority of paper tax returns
31 January: The online deadline and some paper tax returns where the return cannot be filed online
31 January: The payment deadline for what you owe for the previous tax year, and if payments towards the current year's tax bill (called 'payments on account') are due
31 July: The deadline for your second payment on account – if one is due

By Kara Gamell

Still confused? Tax Matters has games you can play to learn about self-assessment.
Check out Register as self-employed and for Class 2 National Insurance contributions with HMRC. Decide if you want to make extra National Insurance contributions in order to qualify for additional benefits.
Register for VAT with HMRC if you supply goods and services whose value is above £60,000.
Start keeping all records of incomings and outgoings in a safe place and file them monthly into date order.
Ask your bank for copies of the summary of annual interest on any accounts you have, as this will have to be declared on your self assessment form (the bank should automatically send you an annual update).
If you have savings, think about starting an ISA, which allows you to save up to £7200 a year tax-free.
Consider getting a professional to do the number crunching; check out the Institute of Chartered Accountants for a list of registered accountants.

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