What you need to know about tax if you're self-employed

Paul Lewis / 02 September 2013

If you’re retired, or retirement is on the horizon, you may fancy using your work talents or hobby skills to supplement your income. But beware – there are tax implications, even for those who see it as ‘pin money’.



More than four million people are self-employed. And the number is growing – by 5% over the past two years.

Older people may choose self-employment to supplement a pension or because they feel they still have much to offer. Perhaps they had to retire young or a hobby has turned into a job. Book-keeping, driving, consultancy, teaching, even mystery shopping are all popular. Trading on the internet or at car-boot sales is also common. Selling your own things is not self-employment – buying them to sell is.

Don't get caught out

HM Revenue & Customs says that if you do any activity to earn money on your own account then that is self-employment. It doesn’t matter if you earn very little or even make a loss, you are still self-employed and must register with HMRC. You can do that up to October 5 after the tax year you first become self-employed – if you don’t, you can be fined £100.

HMRC trawls through small ads, supermarket boards and websites to find unregistered sole traders. You must keep accounts and pay tax on your profits through self-assessment. Find out more at gov.uk/register-for-self-assessment.

Find out more about registering as a sole trader.

Expenses

Your profit is the money you make from self-employment minus the costs of your business. Any profit you make is taxable.

Purchases

Anything you buy for use in your business such as stationery, equipment, online services and anything you buy to sell can all be deducted in full. Computers and larger capital items are treated separately, but capital expenses of up to £250,000 a year are currently allowed in full. 

Travel

Get receipts or keep tickets for buses, trains, car parking, taxis, hotels or any business travel. That can include travelling to premises where you provide a service. If you use your own car then measure the mileage you do for business and charge that proportion of fuel, servicing, repairs, breakdown service, insurance – and interest on a loan to buy a vehicle.

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Telecoms

Your telephone, mobile and broadband will probably be shared between business and personal. Work out how much is a business expense. There is no need to split it exactly every month – just work out the proportion over a period.

Office

The full cost of an office or storage space for the business is an allowable expense. If you use one room of your home as an office and you have four rooms then a quarter of your household expenses such as energy, insurance and council tax – and rent or mortgage interest if you pay it – can be counted as a business expense. Alternatively you can deduct a reasonable monthly amount. 

Professional services 

If you pay someone for advice or help, such as an agent, an adviser, a lawyer, an internet designer or a PR person, then their fees are allowable as a business expense. So are the services of an accountant – except for the cost of preparing a tax return. Interest paid on business loans or credit cards is allowable.

These costs have to be incurred ‘wholly and exclusively’ for your business. The cost of buying or cleaning clothing cannot be claimed unless it is a distinctive outfit – perhaps you need decorator’s overalls. But a smart suit or skirt and top will not count, even if you would only ever wear it for work. Client entertainment is not allowable.

Your self-assessment will have to be done online and will take account of any other income (including any pension), tax allowances and pension contributions to work out what tax is due. If your affairs are simple and your turnover below £77,000 you can use the shorter online pages SA103(S).

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National Insurance

Self-employed people can pay two sorts of NI. Class 2 contributions (C2) are £2.70 a week whatever you earn. You can apply not to pay C2 if you earn less than £5,725 a year (£110 a week). However, C2 counts towards the state pension and at £2.70 a week it’s a bargain if you will be short of the 35 years’ contributions you will need for full state pension if you reach pension age from April 6, 2016. If you are older, you need only 30 years. 

Once you reach state pension age, C2 contributions should stop. These count for every whole tax year you pay them. C2 does not give entitlement to benefits if you are sick or have no work. If you earn more than £7,755 a year (£149 a week) you will have to pay another sort of NI contribution called Class 4 – 9% of your earnings between £7,755 and £41,450 and 2% of earnings above £41,450. (These are 2013-14 figures, so if you are doing your tax return for 2012-13 check the correct amounts). C4 also stops after pension age. But you have to pay it for the tax year in which you reach that age. 

Self-employed people pay more in NI than employed people on earnings up to £12,400 a year but less on earnings above that. You can be both employed in one job and self-employed as well. You pay NI contributions on both up to a limit.

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Self-employed or employed?

Some employers treat temporary workers as if they were self-employed rather than employees so they do not have to operate a PAYE system or pay employer’s NI or pension contributions. Self-employed people have no right to sick leave or holidays. If you have several clients, you tend to work with your own equipment or on your own premises, and you decide when you work, then you are probably self-employed. However, if you have one client, travel to their premises, use their equipment and do what you are told, then you are probably an employee. For details, visit gov.uk/employment-status.

VAT

If your turnover – not profit – exceeds £79,000 a year you must register for VAT and charge it on your fees or sales to your clients. You can reclaim VAT you pay on all your business expenses. But if your turnover is less than £150,000 it is much easier to use the flat-rate scheme, which means you charge 20% but pay a smaller percentage to the Revenue. Visit hmrc.gov.uk/vat and enter ‘flat rate’ in Search. If your business is buying and selling second-hand goods, the VAT position is a lot more complex. Visit hmrc.gov.uk/vat and enter ‘second-hand goods’ in Search. 

* This article gives general guidance. You must do your own research and remember, you are responsible for paying the correct tax and NI. Read Paul Lewis's money articles every month in Saga Magazine.

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.