Self-employment: what you need to know

 In Small Businesses & Startups

As a professional in self-employment, some responsibilities will be more obvious than others – the mortgage, council tax and household bills for instance. But there are also other financial responsibilities which freelancers must be aware of, relating to your status as a small business. So what do you need to do to keep HMRC happy, and keep your business in the black?

Keep accounts in order

Every year you must submit a tax return, either as a sole trader or as a limited company. You are expected to keep a record of accounts that gives a true and fair picture in line with accepted accounting practice. However, the exact form that your accounting records must take is not specified.

You may find that having your accounts audited regularly will keep records in order – or you could set yourself up with some simple accounting software to do it for you. Such software can also set up business-focused features to make your work processes more streamlined and cost-effective, such as automatic invoicing and business expenses tracking.

Be aware that if subjected to a tax inspection, your assets could be frozen until HMRC are satisfied that your finances are in order. Good records will also help to bring tax inspections to a speedy conclusion by helping you prove compliance.

Pay tax and National Insurance contributions

As well as submitting details of income and profits, you will need to pay your income tax bill once a year – on or before the 30th January. In some cases you will need to pay an extra amount ‘on account’ for the next year – the online tax return system will tell you if this is the case.

Being in self-employment, you are also liable to pay both Class 2 and 4 National Insurance contributions (NIC). Class 2 contributions are set at £2.75 per week (assuming you earn over £5885 per year), and must be paid quarterly. Class 4 contributions are currently charged at 9% of your profits between £7956 and £41,865, and 2% thereafter. Class 4 contributions are paid at the same time as your income tax – on the 30th January each year.

Keeping track of income tax and National Insurance obligations is reliant on keeping a good record of accounts. Although a simple spreadsheet can help to capture basic information, using a full-featured accounts software package will give you real-time financial information on your business, allowing you to create an accurate budget and ensuring you never receive unexpected tax bills.

Get advice

Managing self-employment requires your full attention if it is to succeed. This means that outsourcing secondary (but extremely important) tasks like accounting to an expert will guarantee that you meet your statutory obligations and can focus on building a profitable business.

Your expert advisers can work in real-time information-sharing with accounting software packages, to be fully engaged with your business. They will also be able to help you better plan and manage budgets, and advise on any issues, helping your business’ finances to continue a healthy expansion.

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