When a person becomes self-employed they become liable to pay income tax and National Insurance. Once the relevant forms have been completed to register as self-employed, a Self Assessment tax return will be issued for completion. The tax return will ask for all relevant details of income which may require the completion of additional pages for other sources of income, including employment income.

Self-employed people pay Class 2 and Class 4 National Insurance contributions. Class 2 contributions are £2.50 each week for 52 weeks a year. If profit is expected to be below £5315, you may be exempt from paying Class 2 contributions.

To pay Class 2 National Insurance contributions by Direct Debit, a form CA5601 form should be completed which will allow collection of contributions either monthly or every six months. From April 2011, the contributions for Class 2 will be due on 31st July and 31st January each year, the same as payment of Self Assessment tax.

HMRC recommend Direct Debit as a payment method as it is less likely that you will miss payments, is a secure method of payment and users are given protection by the Direct Debit Guarantee. A Direct Debit Instruction has to be completed and returned to HMRC. If a person is newly self-employed, form CA5601 form should be completed and submitted to HMRC who will inform the self-employed individual of the first payment date. Making payments of Class 2 National Insurance will contribute towards certain benefits, like state pension or maternity pay.

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