Unfortunately it is very easy to be self employed without realising it. You might not consider yourself to be running a business empire, but as long as you are undertaking work or trading with the intention of earning money there is a good chance that HMRC will consider you to be self employed.
But I’m not self employed!
As far as HMRC is concerned you can be self employed:
and be also employed
even if it is just a hobby
even if you are not making a profit
even if you only get paid cash in hand
even if you are not getting paid any money, but are getting paid by other means such as vouchers, goods or discounts
even if you don’t spend any of the money
In many cases it can be quite a fine line between a hobby and being self employed. If you are undertaking work with the intention of earning money then you are generally considered to be self employed. The HMRC call it a “profit seeking motive” – you are doing something that you intent people to pay you for, whether or not you make a profit overall. Plus, the more times you do this, (in HMRC speak, the more transactions), the more likely it is to be classified as a trade rather than a hobby. See here for some more information about the HMRC definition of badges of trade, or in normal language, what they count as trading – http://www.hmrc.gov.uk/manuals/bimmanual/BIM20205.htm
What do I need to do about it?
If you realise that you are actually self employed, the first thing to do is to register with HMRC. You will need your NI number and business details e.g. address, date you started trading. This can all be done online and it is useful to create a Government Gateway account at the same time as you will need this later for tax returns. This is the link to register online – https://www.gov.uk/register-for-self-assessment
What does it mean for me?
There are three main consequences of being self employed:
1. you are responsible for your own tax and National Insurance contributions
2. you will need to complete a self assessment tax return each year and pay any tax due
3. you may also have to make Class 2 National Insurance contributions (currently £2.75 per week).
You might not have to pay the National Insurance
If you estimate that your income will be low e.g less than £5,885 for 2014/15 then you can apply for a Certificate of Small Earnings Exception which gives an exemption from the National Insurance payments. There is an online form that you can complete if you think this will be the case. https://online.hmrc.gov.uk/shortforms/form/CWF1ST
The good news – it can sometimes save you money
If your self employment makes a loss overall, then this loss can be used against other income such as employment. For example, you have a normal 9-5 job with the normal PAYE deductions taken each month for tax and national insurance. In addition you do some extra work for yourself at evenings and weekends which counts as self employment. In the first year you need to buy some equipment to be able to carry out the self employed work, so overall in that year you end up making a loss. This loss can be set against the tax you have already paid via PAYE and so you may end up getting some money back when you submit your tax return.
What if I want to stop?
If you stop your self employment, then you need to notify HMRC so that you are not chased for future tax returns. Again you can do this online: https://online.hmrc.gov.uk/shortforms/form/CeaseTrading
Why is this all so important?
Although you might not consider yourself to be in business, if HMRC think that you are then you could owe some self assessment tax returns at the very least. Worst case could be fines for overdue returns and tax to pay. But if you do register, then best case could be that you get some tax back if you are also employed.