In the UK, being self-employed means owning a business as a sole trader or as part of a partnership.
Owning a business as the director of a limited company means being an employee of that company. All three kinds of business are worth considering if you're thinking about self-employment.
When to register as self-employed
In the UK, sole traders and partnerships must register their business with HMRC (Her Majesty's Revenue and Customs) so that they can pay income tax. You must register once your business has started, which is if:
- you have sold goods
- you have sold services
- you have advertised your business
You must register by 6 months after the end of your first tax year i.e. by 5th October in the next tax year. The UK tax year starts on 6th April and ends on 5th April.
Being a sole trader (or a sole proprietor) means one person is responsible for the business. Sole traders must register with HMRC to submit an annual Self Assessment tax return.
Being a partnership means that multiple people (or limited companies) share responsibility for the business, although a nominated partner will be responsible for tax returns.
The nominated partner must register with HMRC to submit an annual partnership Self Assessment tax return. Each partner must also submit an individual Self Assessment tax return.
A partnership may also incorporate itself as a Limited Liability Partnership (LLP). An LLP is similar to a limited company but it is taxed as a partnership.
Being a director of a limited company means that the company is responsible for the business. A limited company is run by directors.
Directors are employees of the company, but must register with HMRC to submit an annual Self Assessment tax return. Directors may pay tax and National Insurance contributions through PAYE (Pay As You Earn). Every limited company has shareholders - people or organisations who own shares in the company. Directors may or may not be shareholders.
A limited company must:
- register with Companies House and send an annual return
- register with HMRC to submit a Company Tax Return and pay Corporation Tax
- send annual statutory accounts to shareholders
Sole traders, partners and directors must all complete an annual Self Assessment tax return. To register for Self Assessment you'll need:
- your National Insurance number
- your contact details
- the start detail of your business
After you've registered for Self Assessment you'll received a Unique Taxpayer Reference (UTR) number. Your annual Self Assessment form will help you calculate how much income tax you should pay on your earnings as a self-employed person.
All self-employed people (sole traders and partners) are eligible to pay both Class 2 and Class 4 National Insurance contributions.
- Class 2 is paid unless you have a small earnings exemption
- Class 4 is paid if you earn over a certain threshold
Class 2 contributions are paid to HMRC by Direct Debit. Class 4 contributions are calculated and paid via the Self Assessment tax return.
All self-employed businesses must register to pay VAT (value added tax) if the turnover in a single tax year is more than the VAT threshold. Turnover is the gross revenue of the business - the amount of money made before expenses are deducted. You can check the current VAT threshold and register for VAT with HMRC.
Becoming an employer
If you are employing staff on a payroll then you must register as an employer with HMRC. You will receive a PAYE (Pay As You Earn) reference number and an Accounts Office reference number. You must also:
- check each employee is eligible to work in the UK
- give each employee a Written Statement of Employment Particulars
- pay each employee at least the National Minimum Wage
- get Employers’ Liability (EL) insurance
It is important for contractors to determine whether they are employed or self-employed. Typically, employment legislation does not cover self-employed people. The role of a union can be particularly important in advising self-employed contractors about the legal structure of their business and directives such as Agency Workers Regulations.
Further guidance is available on the HMRC and GOV.UK websites. Prospect's free podcast 'Thinking about Self Employment?' offers additional self-reflection tools to help you consider what kind of business is for you.