Tax for the self-employed Are you self-employed?

If you work for yourself, you can claim tax relief on most of the expenses you incur when you’re running your business. 

First though, you have to be sure you count as self-employed (as a sole trader, as opposed to as an employee of your own company).

To count as self-employed, you need to be able to convince HMRC that you genuinely work for yourself.

Questions to ask yourself

The more of the following questions you can answer ‘yes’ to, the more likely you are to count as self-employed:

• Can you send someone else to do the work? Would you pay them out of your own pocket?
• Can you turn down work when it is offered?
• Do you control how the work is carried out – for example, where you work or the hours you keep?
• Have you invested your own money in your business?
• Do you supply the main items of equipment required in your work, such as computers?
• Do you bear any losses?
• Do you have to correct mistakes at your own expense?

If you are still unsure, you can check the likely HMRC decision by using its employment status indicator tool, but remember that this is only an indication and may give a wrong answer. 

Registering to be self-employed

If you are self-employed, you need to register for tax and National Insurance contributions within three months using form CWF1 in HMRC booklet SE1 – Are you thinking of working for yourself?. 

You can also register by phone (08459 154515).

This will give you a unique tax reference, if you don’t already have one, and you should then automatically get a tax return. 

Registration ensures you start paying National Insurance Contributions (NICs) – you can be fined otherwise.

Employing family members

If your husband or wife works for you as part of your business then it is fine to pay them a wage as an employee. 

If they pay tax at a lower rate than you, then paying them a wage is a simple way of saving tax. 

The work they do must contribute to the business, but as long as they are paid a reasonable rate (ie not more than you would have paid a third party) for the work they have done and above the minimum wage, it will count as an allowable expense and can be deducted when you work out your profits. 

National insurance and family members

If you pay them less than £110 there is no National Insurance to pay, but paying more than £95 will protect their right to a state pension. 

Otherwise you need to bear in mind employer NICs as a cost of business.

However, if you employ your husband or wife for something other than the purpose of your business – for example as your carer – then it doesn’t count for tax purposes even if you are paying them a wage.

Different rules for small companies

This guide explains the tax treatment of people who work as a sole trader or in a partnership, but it is also possible to run your business as a limited company.

Until April 2004, small businesses were able to make annual tax savings of up to £4,000 by operating as a company. These tax breaks have now been largely eroded, though for small businesses (profits under £50,000) there is still an incentive to incorporate.

Operating as a small business

Tax benefits aside, however, operating as a small business means more hassle; more formal and costly accounting and reporting; more formal procedures for drawing money from the business, and tougher tax rules for fringe benefits and expenses. 

It also brings with it the possibility of a big tax bill on closing down a self-employed business to switch to a company.

For more information, see our books Working for Yourself or Tax Handbook 2011/12.

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