SELF-EMPLOYED

If you're self-employed, you are responsible for paying your own tax and National Insurance Contributions (NICs). You'll need to keep business records and details of your income so you can fill in an annual Self Assessment tax return. You may also need to register for VAT.

Income Tax and Self Assessment

Once you're registered as self-employed, you'll be a Self Assessment taxpayer. You'll have to fill in a tax return each year and give details of your earnings and any other income you get. This information is used to work out how much tax you have to pay.

National Insurance Contributions (NICs)

Class 2 NICs

Class 2 NICs count towards certain benefits, like State Pension, Maternity Leave and Bereavement Benefit.
You pay Class 2 NICs at a flat rate of £2.30 a week (2008-2009) if your earnings are above £4,825 per year. You can choose to make your payments either quarterly or by monthly direct debit.
Bear in mind that Class 2 NICs don't count towards the additional State Pension, Statutory Sick Pay or Jobseeker's Allowance, so you might want to think about making other arrangements like a personal pension and income protection insurance.

Exceptions to paying Class 2 NICs

If you earn less than £4,825 per year you can apply for a certificate of small earnings exception and not pay Class 2 NICs. However, you might decide to carry on paying them voluntarily to keep your entitlement to the State Pension and other benefits.

Class 4 NICs

The amount of Class 4 NICs you have to pay for any tax year is based on your profits for that year. You pay eight per cent on annual profits between £5,435 and £40,040 and one per cent on any profit over that amount.
You work out your Class 4 NICs on your tax return and pay them alongside your Income Tax. Class 4 NICs don't count towards benefit entitlements.

Value Added Tax (VAT)

If your business turnover is more than the VAT threshold (£67,000 from 1 April 2008) you will normally have to register for VAT. Even if your turnover's below the threshold it might benefit your business to register voluntarily.
Contact us if you need more information how a VAT registration can benefit your business.

Record keeping

Legally you have to keep records for your business and for any other income you get. This is so you can fill in your tax return and show that the figures are right. You'll need to keep at least:

invoices for sales and purchases
receipts for business expenses
bank records

Good records will also save you time and help you run your business more efficiently.

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