Why the self-employed need to register with HMRC

Tax is a crucial consideration for any business, whether they’re huge multinational corporations or a single-person operation running out of a home office. If you’re self-employed or a sole trader, this also includes you.

Registering with HMRC can seem like an overwhelming task, so we’re here to help with our breakdown of why the self-employed need to register with HMRC and how you can get it done quickly and simply.

  1. What is my employment status?
  2. How do I register my employment status?
  3. What tax do I need to pay?
  4. What if I don’t register?
  5. Do I need insurance if I’m self-employed?

What is my employment status?

Your employment status determines which taxes you need to pay. There are a few different employment statuses, including:

  • Worker
  • Employee
  • Self-employed and contractor
  • Director
  • Office holder

If you’re self-employed or a sole trader, you’ll probably fall into the self-employed and contractor employment status. However, if you run a limited company on behalf of shareholders, you’ll be classed as a director. Office holders, however, are those appointed to a position by a company or organisation, but don’t have a contract or receive regular payment from them.

To find out which employment status fits you best, give the Government’s Check Employment Status for Tax (CEST) tool a go.

How do I register my employment status?

For sole traders and self-employed professionals

If you’re self-employed, start by heading over to the Government’s online registration portal to start the registration process. You’ll want to make sure you have the following information to hand:

  • The date you started your business
  • Your personal details, including National Insurance number and your home address
  • Information about the work you do

Once you’ve finished your registration, you’ll be sent a letter by HMRC with your 10-digit Unique Taxpayer Reference (UTR). Your online HMRC account will also be set up, allowing you to access a range of digital services from the Government. This process can take between 7 to 10 days, but you can follow up with HMRC to get an update if it’s taking longer than that.

For limited companies

If you’ve set up a limited company, you’ll also need to register for Corporation Tax. To do this, you’ll need to register your business with Companies House. Once that’s done, you’ll receive your certificate of incorporation, which confirms your business legally exists and shows your company number and date of formation.

As part of this process, you’ll need to give at least 3 pieces of personal information about yourself and your shareholders or guarantors, such as:

  • Town of birth
  • Mother’s maiden name
  • Father’s first name
  • Telephone number
  • National insurance number
  • Passport number

Registering with Companies House costs £12 and your business is usually registered within 24 hours. Once you’ve completed your registration, you’ll need to create a Government Gateway user ID and password.

After completing these steps, you can register for Corporation Tax from the business Government Gateway account you just set up. You’ll need your business’ 10-digit Unique Taxpayer Reference (UTR), which will be sent out to you within 14 days of your business being registered with Companies House. You’ll also want the following information to hand:

  • Your business’s registration number
  • The date you started to do business (your business’s first accounting period will begin from this date)
  • The date your annual accounts are made up to

Once that’s done, HMRC will give you your deadline for paying Corporation Tax. You’ll need to file a Company Tax Return even if you make a loss or don’t have any Corporation Tax to pay.

What tax do I need to pay?

Your tax obligations will depend on whether you register as a sole trader or as a limited company.

If you’re a sole trader, you’ll need to pay income tax, as well as class 2 and class 4 National Insurance contributions. The amount you pay will be determined by your Self Assessment tax return, which will need to be submitted by 31st January every year. If your annual turnover exceeds the VAT threshold (£85,000 for tax year 2022-23), you’ll also need to register for VAT.

You’ll make payments to HMRC on 31st January and 31st July each year, although these can be staggered by arranging a payment plan with HMRC.

As a limited company, you’ll pay Corporation Tax, which is payable against your profits, as well as any employee’s National Insurance Contributions (13.8%), as long as their earnings are over £166 a week). Companies aren’t able to benefit from any tax-free allowances, but they can claim expenses and deductions for things like salaries for employees (even if you’re the only employee), travel and equipment, to make their total corporation tax bill smaller. Right now, the corporation tax rate is set at 19%.

What if I don’t register?

If you don’t register yourself as self-employed, you’ll be setting yourself up for a multitude of potential legal problems. You don’t need to register right away, but there is a cut off to register: the 5th October of your business’ second tax year. Fines for failing to register with HMRC as self-employed can be as much as 30% of tax you owe, and this penalty will need to be paid in full before your next tax return deadline the subsequent 31st January.

Do I need insurance if I’m self-employed?

Getting business insurance is always recommended, whatever industry you’re operating in. However much you plan ahead, you never know when disaster could strike, leaving you with a huge bill to foot. Having the right insurance will take the stress out of these situations, allowing you to focus on running your business with confidence.

Insurance is also considered by HMRC as an allowable expense, and can therefore be deducted from your taxable profits for the year.

As for what insurance you’ll want to consider, the two essential types for the self-employed are Public Liability insurance and Contents insurance.

Public Liability insurance protects you if a claim is made against yourself or your business by a third party who has suffered injury or illness as a result of your business’ operations. Basically, if someone gets hurt on your premises, you’re covered for any compensation costs that may come of it.

Contents insurance protects any equipment, stock, or other items kept within your business premises from loss, damage, or theft, and covers any repairs or replacements. Without this, you’ll be risking having to pay out huge bills to replace or repair the equipment and stock that keep your business running.

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