You’ll need to:
keep records of your business’s sales and expenses
send a Self Assessment tax return every year
pay Income Tax on your profits and Class 2 and Class 4 National Insurance - use HMRC’s calculator to help you budget for this
You must register for VAT if your turnover is over £85,000. You can register voluntarily if it suits your business, for example if you sell to other VAT-registered businesses and want to reclaim the VAT.
Find out more about working for yourself and UK guidelines
Sole Trader or Limited Company
If you start working for yourself, you’re classed as a sole trader. This means you’re self-employed - even if you haven’t yet told HM Revenue and Customs (HMRC). Its a good option if you plan to work on your own and don’t intend to grow your business beyond that. Find out more
A limited company is a company ‘limited by shares’ or ‘limited by guarantee’. It is legally separate from you but as a Director of that company you still have some legal responsibilities. Find out more
Registering as Self-Employed & paying tax
Tell HMRC that you’re now self-employed, which you can do online. You'll then receive a letter in the post with your Unique Taxpayer Reference (UTR). You can then activate your online account using the code you receive in the post.
You'll be required to complete an annual tax return via HMRC’s Self Assessment tax system. The deadline for submitting your tax return and paying your annual tax bill is 31 January.
What is IR35
The off-payroll working rules can apply if a worker (sometimes known as a contractor) provides their services through their own limited company or another type of intermediary to the client.
An intermediary will usually be the worker’s own personal service company, but could also be any of the following:
The rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same Income Tax and National Insurance contributions as employees. These rules are sometimes known as ‘IR35’.
The client is the organisation who is or will be receiving the services of a contractor. They may also be known as the engager, hirer or end client.
Find out more and how the rules apply to you.
If you are working 'outside IR35', it means you are seen by HMRC as self-employed and are operating legitimately as an independent contractor. You’re able to pay yourself in a tax-efficient way, such as through your limited company. You will have the responsibility of ensuring that you are paying the right amount of national insurance and tax on the money that you receive for your work and that you are not subject to PAYE by the contracted employer.
Which category do I fall into?
If you are unsure of whether your situation falls inside or outside of IR35, it's best to source independent legal advice. The HMRC has also developed an online employment status tool (CEST) for contractors unsure of their liability under IR35. Check your eligibility here
The cost implication of falling either inside IR35 or outside IR35 will depend on your contract pay, so your daily/weekly/monthly pay rate and how you currently extract your income. Generally speaking, it is estimated that working inside IR35 could cost you around 20-25% of your income because of Employer’s National Insurance. For an exact amount based on your circumstances, it's worth using an IR35 calculator.