Introduction to self-employment
Self-employed people are those who ‘work for themselves’. We cover in detail many areas which low-income self-employed people may face on another website that we, the Low Incomes Tax Reform Group (LITRG), maintain. This page discusses some of the points that low-income self-employed people need to understand and consider and links to the relevant section on the main LITRG website.
If you are self-employed, you will have to deal with HM Revenue & Customs (‘HMRC’), as you need to report your income and pay your taxes, including National Insurance contributions, to them. HMRC also pay out tax credits and other benefits, you should bear in mind that tax credits and some other benefits are gradually being phased out and replaced by universal credit, which is dealt with by the Department for Work and Pensions.
HMRC do not always get things right. So it is important for you to check the tax you pay on your self-employment income. You may also need to contact HMRC if you do not understand something or if you disagree with them.
On our main LITRG website, we provide information and help to encourage you to try and solve your tax problems for yourself. It is easier and cheaper in the long run if you can understand and manage your own tax affairs.
It is often difficult to know whether you are employed or self-employed but it is important you understand so you can get your tax right. Firstly, it is important to understand and establish whether you are employed, self-employed, both or neither. Assuming you are self-employed, then the following will tell you what you need to know about dealing with tax when you work for yourself. In particular, we provide information on the following areas of taxation for the self-employed.
- How do I register for tax and National Insurance? – this covers why you may need to register with HMRC as self-employed, the registration process, and what to do if you do not know your National Insurance number.
- What dates are important for self-employment? – this provides information on what is self assessment and the deadlines you need to know for paying your tax and filing your self assessment tax return.
- What is the trading allowance? – this section explains about a new allowance of £1,000 introduced from the 2017/18 tax year. The allowance can be used against trading and miscellaneous or casual income. It may mean that you do not need to register your self-employment or complete a self assessment tax return if your income is very low.
- Working out profits, losses and capital allowances – this section provides you with the information you need to be able to work out your taxable profits or losses if you are self-employed.
- Can I claim for pre-trade expenses? – before you start being self-employed you may have incurred some business expenses; these are called 'pre-trade expenses’. This section looks at what are pre-trade expenses, can you claim tax relief for these expenses and what happens if this means you make a tax loss.
- How do I work out my taxable profit? – this section explains about the two different ways you can prepare your accounts for your self assessment tax return, the cash basis and the accruals basis. It also explains about accounting dates and taxable basis periods, overlap profits, keeping business records, and how the trading allowance works.
- What business expenses are allowable? – this section explains the difference between revenue and capital expenditure, what expenses are allowable for tax and covers working at home and car expenses.
- What capital allowances can I claim? – capital allowances are a way of obtaining tax relief on some types of capital expenditure. This section explains how you can claim capital allowances to reduce your taxable profit, what capital items are eligible for capital allowances and the different types of capital allowances available.
- What if I make a loss? – this section explains what a trading loss is and the different ways you may be able to utilise the loss to get tax relief.
- What is the cash basis? – this section provides additional detail on how you can prepare your accounts using the cash basis, the differences between the cash basis and the accruals basis, and the simplified expense rules which can be used when working at home, using your own vehicle for business purposes and living on a business premises.
- How do I work out my profits for Universal Credit? – Universal Credit (UC) is being rolled-out to replace certain other benefits. This section covers how profits are calculated for the monthly reports required by the Department for Work and Pensions to claim UC.
- What tax allowances am I entitled to? – you only pay income tax on taxable income that is above your tax allowances. This section explains the different tax allowances available and their eligibility criteria.
- How do I report my self-employed income and pay tax on it? – this section covers completing a self-assessment tax return for HMRC and what happens if you have a problem completing it or make a mistake. It also covers what business records you need to keep, how your tax is calculated and when you need to pay your tax, as well as the new 'Making Tax Digital for Business' system.
- What National Insurance do I pay on self-employed income? – you currently pay two different classes of National Insurance contributions (NIC) if you are self-employed – Class 2 and Class 4. This section explains how Class 2 and Class 4 NIC are calculated, and how they are paid.
- Enquiries, penalties and debt – this section will help you if you are the subject of an enquiry by HMRC. This page will help you understand the process, your rights and what to do if you end up with unexpected tax debt. It also covers penalties that HMRC can charge you, either for missing a deadline or for making an error.
- What business records should I keep? – this section explains what business records you need to keep in order to prepare an accurate tax return and how long you should keep them.
- How do I repay my student loan if I am self-employed? – you may have a Plan 1 or Plan 2 student loan, our section on student loans will explain how repayments are calculated and paid to the Student Loan Company through the self assessment tax system,
- Pensions and self-employment – this section provides guidance on the tax reliefs relating to pension contributions.
- Do I have to pay VAT if I am self-employed? – Not all businesses have to be registered for Value Added Tax (VAT) and some may choose to voluntarily register. This section covers some of the basics such as the VAT rate, when you need to register, the registration process and VAT returns, as well as explaining the new ‘Making Tax Digital for VAT’ system.
If you are employed, we suggest you also visit our ‘Employed’ section.
If you have come from abroad to work in the UK, we suggest you also visit our ‘International students’ section.
If you want to know whether you are entitled to receive government support to supplement a low income (working tax credit) or to help those with children (child tax credit) visit our tax credits section. Both of these types of tax credit, together with certain other benefits, are gradually being replaced by universal credit.
If you think you might be entitled to state benefits, we provide an overview of the main benefits on the LITRG website.
If you do not agree with a decision of HMRC, find out what action you can take on our ‘Tax appeals’ page.
If you are unhappy with the way in which you have been treated by HMRC, you may be able to make a complaint.
HMRC manage the UK tax system. You can contact them with general income tax enquiries or specifically in connection with self assessment.
HMRC have produced a short film on 'Working For Yourself' which explains what to do if you are planning to become self-employed. HMRC also have e-learning packages available online and run regular webinars which you can join to help you to get started in understanding your tax position when self-employed.
You can find out where to get help from third party organisations in our getting help section.