Understanding HMRC Self-Employment Rules.

Defining Self-Employment

Before delving into the specifics, it is crucial to clarify what constitutes self-employment. According to HMRC, you are considered self-employed if you run your business for yourself and take responsibility for its success or failure. This status applies to sole traders, freelancers, and partners in a business partnership. Self-employed individuals have the autonomy to decide how they work, but with this autonomy comes the responsibility of managing one's own taxes and National Insurance contributions. A self-employed person is any one of the below.

Registering with HMRC

One of the fundamental steps in becoming self-employed is registering with HMRC. This process involves notifying HMRC of self-employment status to ensure they are taxed appropriately. We do, and suggest that our clients to encourage this and ask for evidence of registration.
 

File your Self Assessment tax return online - GOV.UK

Self-Assessment and Tax Returns

Self-employed individuals are required to file an annual Self-Assessment tax return. Encourage your team to do so.
 

National Insurance Contributions

Self-employed individuals must also pay Class 2 and Class 4 National Insurance contributions, depending on their profits. Class 2 contributions are a flat weekly rate, while Class 4 contributions are calculated as a percentage of your annual profits. These contributions are crucial as they count towards your State Pension and other benefits.
 

Allowable Business Expenses

Understanding allowable business expenses is vital for self-employed individuals as these can be deducted from their income to reduce taxable profit. Common allowable expenses include office costs (working from home qualifies), own mobile, laptop, PC, travel expenses. It is essential to ensure that these expenses are for business purposes to qualify.
 

VAT Registration

When their business turnover exceeds the VAT threshold, currently set at £85,000, they must register for VAT. Voluntary registration is also an option for businesses below the threshold, which can enhance credibility and allow for VAT reclaim on purchases.

There are certain principles that HMRC uses to ascertain whether an employment is self-employed or employed and therefore comes under the PAYE system.
 

An employed situation is indicated although not conclusive, by such as hours of work are Monday to Friday 9:00 to 5:00 you must attain work at our office in wherever it is etc then talk about your pension scheme when you're allowed what you must do if you're sick and not turning up to work all the normal things that an employment would do.
 

A common myth is that someone who only has one employer must be deemed to be an employee. They may or may not be, the point of the HMRC principle here is that self-employed people are they free to have other gainful employments. Therefore, clearly put that in the contract.
 

A clear statement that a person is responsible for their own income tax and national insurance.

Substitution a self-employed person if they cannot carry out the work themselves is free to employ somebody else to carry out or at least help them with that work. So, for example employing a leaflet distributor for leads.
 

For example, if you employed a window cleaner and paid them could you later be charged PAYE from that window cleaners’ income because it turned out that the window cleaner only had you as a customer and therefore you were the sole employer. Of course not, in practise you would have no knowledge or control over any other people that they cleaned windows for.