How do you know if you are self-employed?

Are you working and charging your customers for your time, products or services directly?  Then you are what is know as self-employed and you are a sole trader.

If you have set up a limited company with Companies House, you are not self-employed.

If you have a little hobby, like making and selling hand crafted items, or buying items and reselling them at a profit on ebay – you are self-employed.

What does this mean?

If you are billing your customers more than £1,000 in a tax year (which runs from 06 April to 05 April), then you will need to complete a self-assessment tax return each year.

You can find the form to register here

Please also read our Personal Tax page for more information.

What records do you need to keep?

It is really important that you keep records for your self-employed business as you are responsible for reporting the information to HMRC correctly.

Make sure that you keep:

• The invoices you raise to your customers
• Receipts to back up all purchases and expenses
• Bank statements – ideally you will have a separate account for the business

You need to keep all of these documents somewhere safe, either in a file or online.

There are lots of software packages out there to help keep your records straight and to help you to keep a track of where you with your finances at any point in time.

What expenses can you claim?

We all want to know how to reduce our tax liabilities don’t we? So, as a self-employed business there are all sorts of expenses that you can claim. The general rule is, was the cost incurred ‘wholly and exclusively’ for the purpose of the business. In other words, would you have bought it if you didn’t have the business?

Every business is different, but areas to consider are:

• Supplies / equipment that you purchase to sell on to your customers
• Travel costs – including mileage, parking and public transport
• Protective clothing (such as steel toe cap boots) or uniforms with your business name on – sadly you can’t claim day to day clothing that you purchase for work
• Staff costs, if you have employees
• Advertising, website hosting, business cards
• Computer equipment – such as laptops and printers
• Stationery – including pens, notebooks, stamps
• Business telephone costs and internet (if it’s a dedicated line)
• Business premises costs or use of home as office (calculations can be found on HMRC website)
• Training – only to enhance an existing skill

How do I work out my profit?

In simple terms, you will pay tax on the invoices you raised to your customers, less the allowable expenses that you incurred.

So say you invoice your customers £35,000 during the year, but had expenses of £10,000, you will only pay tax and National Insurance on £25,000.