Many freelancers start off keeping their day job and freelancing in their spare time. It can be a good way of finding your feet and trying it out before taking the plunge and going freelance full-time.
However, because of the casual nature of the work, some freelancers are in danger of ignoring the legal implications of working on the side. You might not think your side venture counts as a business but it is and you have certain responsibilities as a result.
Whether you’re planning on setting up a full blown business or are just thinking of an occasional casual thing alongside your job, the rules are the same and you still need to register as self-employed with HMRC if you plan to be making any money from your ventures.
Good news is that it’s, fairly easy to do.
What does being a sole trader actually mean?
As a freelancer, you’re going to have to register as self-employed and more specifically as a sole trader.
Despite how it sounds, it doesn’t actually apply to people who just work alone. So you can take on staff if you want. It just means that you’re solely responsible for the business.
How to register
You should register as soon as you can after starting your business and can through the government’s website here.
You have until 5th October in your business’s second tax year in order to do so. If you don’t register in time you won’t face a penalty as long as you send your tax return and pay your bill on time.
How you register will depend on whether you’ve ever sent tax returns before.
Never sent one?
If you’re a sole trader who has never sent a tax return, you need to tell HMRC you want to be a sole trader by registering as a new business.
You will then register for Self-Assessment tax returns which you’ll use to report your income at the end of every tax year, and Class 2 National Insurance at the same time. For more information about the different types of National Insurance you need to know about, click here.
Sent a tax return in the past?
If you’re a new sole trader who has sent a tax return before as an individual for things like investment or rental income, you will need to register as self-employed.
You will also need to register for Class 2 National Insurance using a CWF1 form. This will allow you to continue using your Self-Assessment account.
In order to do this, you will need your Unique Taxpayer Reference (UTR) so that HMRC can link your accounts. You can find this on your previous tax returns, online account or from documents from HMRC. Contact HMRC is you can’t find your UTR.
Starting up again?
If you’ve ever registered or done business as a sole trader, then you will need to reregister in order to set up trading again. You will need to reregister using the CWF1 form and your UTR so that you can use your existing account.
The process of registering as a sole trader will take around 10 working days, or up to 21 if you’re registering from abroad. This is because HMRC will post you an activation code which you will need when you sign into your online account for the first time.
Once you’ve registered and set up a system for managing your finances you can then go about growing your business. You may even want to hire an accountant who can take care of your bookkeeping and taxes so that you’re free of the stress and the time that you could be spending elsewhere on working on your business.
The work’s not over once you’ve registered. As a business owner, you have certain legal responsibilities in order to comply with HMRC’s rules to avoid getting penalised.
It’s important to make sure you’re always running your business by the books and aware of how much tax you’re going to owe so you don’t get hit either with a nasty surprise or even a fine if you don’t pay your taxes on time.
In order to keep your business above board, you will need to do the following:
- Keep records of sales and expenses, including bills for expenses
- Send a Self-Assessment tax return each year
- Pay income tax on your profits and Class 2 or 4 National Insurance
- Settle debts
- Register for VAT if your turnover reaches the threshold of £85,000
Hiring an accountant will make this process easier as they will be able to give you the best advice regarding things like expenses and tax efficiency as well as making sure that your business is doing everything the right way.
Hiring an online accountant and using a free bookkeeping software like Pandle will help you save money here.