One of the first things which is discussed in my free initial consultations is whether or not somebody has registered as self employed with the tax authorities. There are a number of reasons why people think they don’t have to:
- But I’m not taking any money out of the business
- I’m employed so I’m paying tax through PAYE
- I’m not making enough profit to pay any tax on it
- I get paid in cash
- I don’t get paid anything, I just get given vouchers / goods / a discount
BUT – if you are working and receiving some sort of payment (even if its payment in kind) then you are either employed or self employed. If you are not working for somebody else who sorts out your PAYE, National Insurance etc. then you should assume you are self employed. You MUST then register as self employed with HM Revenue & Customs, complete an annual self assessment tax return, and pay any resulting tax and National Insurance.
1. I’m not taking money out of the business
If you are self employed then you are liable to tax on every penny of profit that your business makes – even if you leave it in the business bank account. It doesn’t matter whether or not you withdraw the money, it is still taxable.
2. I’m employed so I’m paying tax through PAYE
If you are earning additional income above and beyond your employment salary then you also have to pay tax on that in addition to your employment PAYE.
3. I’m not making enough profit to pay any tax on it
Great – BUT you still need to register and declare how much profit you are making so the tax authorities know you don’t need to pay tax on it.
4. I get paid in cash
By law you have to declare ALL your earnings, even if they don’t go through your bank account. If you don’t declare your cash income then that is technically tax fraud.
5. I don’t get paid anything, I just get given vouchers / goods / a discount
That is still viewed as income by the tax man – you need to calculate the cash equivalent and declare that income in your tax return.
A couple of things to remember
- Registering as self employed is easy and you can even do it online
- You have to pay income tax and self employed National Insurance contributions – read my blog on tax for sole traders for more information
- If you haven’t already used it up with other income you have a personal allowance which stops you from having to pay tax until your income is at a high enough level
- Self assessment tax returns are easy to complete if you have a simple business and if you are organised with your accounts
- If you don’t register you should expect to be liable to fines, paying back taxes, interest on your back taxes, etc.
- It is also easy to tell HMRC if you are no longer self employed – you should write to your Tax Office and tell them you have stopped trading
If you’re still not sure…
HMRC provides a list of questions you should ask yourself to check whether or not you are self employed. You can also complete their Employment Status Indicator tool – which is completely anonymous. If in doubt then talk to an accountant as this can be a complicated area.