If you become self-employed, it is important that you register with HM Revenue & Customs so that relevant records can be set up for you. This includes records for National Insurance, self-assessment and, if you have any employees, a Pay As You Earn scheme. If you have registered online, an online account for self-assessment will also be created for you. HMRC will issue a number called a Unique Taxpayer Reference. You must use this whenever you write to HMRC, including when you complete and submit a yearly self-assessment tax return.
If you are already registered for self-assessment for another reason, you must still inform HMRC of your self-employment and complete a self-employment page, form SA103. When you start self-employment you should let HMRC know. The deadline for registering as self-employed is 5th October following the year in which you became self-employed.
For instance, if you start self-employment on 10th April 2011, you will need to fill in a 2011-12 self-assessment tax return and must notify HMRC by 5th October 2012. If you miss the deadline you could receive a ‘failure to notify’ penalty from HMRC.
Class 4 National Insurance contributions are payable on profits due to your self-employment above a specified limit each year. You will be charged Class 4 National Insurance when you submit your self- assessment tax return. You must also make arrangements to pay contributions for Class 2 National Insurance, which are £2.65 per week for 2012-13. If you don’t pay these contributions, entitlement to certain state benefits, like basic state pension could be affected. Each year an exemption threshold is set and for 2012-13 is £5,595. If you expect your self-employment’s net profits to be below the threshold for a particular year, apply for exemption using form CF10.
Your net profits from self-employment are your total earnings less deductible expenses, allowances and tax reliefs. Once HMRC have approved your application for exemption, you will receive a Certificate of Small Earnings Exception. However, if your application for exemption from Class 2 National Insurance Contributions is approved by HMRC, you may forfeit entitlement to some state benefits.
This includes the basic state pension, bereavement benefits and maternity allowance. This could also affect the amount of benefit received by your widow, civil partner or widower. If you receive the exemption certificate, it is still possible to pay some voluntary contributions so that entitlement to some benefits won’t be affected, but you must inform HMRC of this when you complete the form CF10.
Class 2 National Insurance contributions have to be paid by anyone who is aged between 16 and state pension age unless you have been granted a Certificate of Small Earnings Exception after completing form CF10. You will pay the contributions at the rate set for that specific year. If you pay your contributions more than 12 months after they were due, you may be charged at a higher rate. If you are self-employed in more than one role, you must add together all the net profit to reach a total figure and can only apply for exemption if the total amount is below that year’s exemption threshold.
The exemption certificate will be valid from the date you applied using form CF10. It can also be backdated 13 weeks. However, prior to this date you must pay Class 2 National Insurance contributions. If you earn less than the threshold for a particular year but have paid Class 2 National Insurance contributions you may claim a refund of contributions paid. Send proof of your earnings that year to HMRC before 31st January following the tax year in question.
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Disclaimer: The information contained in these articles is of a general nature and no assurance of accuracy can be given. It is not a substitute for specific professional advice in your own circumstances. No action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a consequence of the material can be accepted by the authors or the firm.