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When you work for yourself, you are responsible for paying tax and National Insurance on your income. It’s important to stay on top of all your records in order to calculate this.
Work out your employment status
To work out how much tax and National Insurance you should pay, first you need to work out whether you’re employed or self-employed. This is usually straightforward, but sometimes it’s a bit more complex – for example you could be employed in one job and at the same time self-employed in a different job.
The HM Revenue & Customs (HMRC) website has a tool called the Employment Status Indicator that will work out your employment status for you based on your answers to a series of questions. It’s completely anonymous and won’t ask for your name or any other personal details.
Before using the Employment Status Indicator, HMRC provides very useful information relating to employed or self-employed status in its publication ES/FS1 (PDF) .
Tips for using the Employment Status Indicator
There are two pages to read before you get to the tool.
- On the first page, read the information and click “Go to the next page”
- On the second page, read the ‘Conditions of use’ section and if you agree, click “I accept the conditions of use – go to the ESI tool”
On the next page, click the green “Start” button to begin.
The tool uses some technical language, so when you answer the questions remember:
- You are ‘the worker ’
- The person or company you work for is ‘the engager ’
Register with HMRC as self-employed
As soon as you become self-employed you must tell HMRC. You can do this by registering online to pay taxes on the HMRC website or by calling the HMRC Newly Self Employed Hotline on 0300 200 3504.
The very latest you can register with HMRC is by 5 October after the end of the tax year for which you need to file a tax return.
The tax year runs from 6 April one year to 5 April the next. If you register too late you may be liable to penalties.
If you’re self-employed, you probably need to pay Class 2 National Insurance contributions as well as Income Tax. These contributions pay for benefits such as the basic State Pension, Maternity Allowance and Bereavement Benefit – if you don’t keep your contributions up to date, or your payments are late, it could make it more difficult to claim these benefits.
To make sure you don’t miss any payments, it’s best to pay your National Insurance contributions by Direct Debit .
Check whether you need to register for VAT
Some self-employed people also need to register for VAT. Others may benefit from registering voluntarily. The GOV.UK website can tell you if this applies to you.
Keep good records
To work your tax out correctly you’ll need good records of the money that comes into and goes out of your business. It will be much easier to fill in your tax return if you keep good records as you go along rather than trying to find all your invoices and receipts at the end of the year. You can be fined for failing to keep records.
Your basic records must include:
- All your sales and takings
- All your purchases and expenses
To work these out you should file carefully any paperwork that relates to your business, including, for example:
- Mileage records
- Bank statements
- Receipts for purchases
- Your P60s if you are also employed
If these are in electronic form you don’t necessarily need paper copies, but you should make sure you keep the electronic versions carefully.
Fill in a tax return every year and pay your tax on time
The tax year begins on 6 April and ends on the following 5 April. In April each year, HMRC will send you a letter telling you to complete a tax return online or a paper tax return to complete for the tax year that has just ended.
There are different deadlines for completing your tax return and paying the tax you owe.