Once a person becomes self-employed and no longer under the PAYE system, it is up to them to comply with the annual self assessment tax return that has to be paid each year. So if you are a freelancer, consultant or a sole trader this applies to you.
Under self assessment, you are obliged to estimate your own tax, and to pay accordingly. One of the first calculations you have to make is your National Insurance contributions. If you are self-employed then you have to pay two types of contribution:
- Class 2 – a flat rate payment which must be paid each week unless you are exempt. Normally class 2 contributions are paid in arrears by a quarterly bill every 13 weeks or direct debit every month
- Class 4 these are paid on profits and gains at or above a set level. These are normally collected by HM Revenue & Customs
As regards your employees, self assessment means that you must:
- Provide P60 forms to employees by 31 May after the end of the tax year
- Calculate the cash equivalent of benefits in kind
- Provide details of their expenses and benefits in kind ('P11D details') to relevant employees as well as the Inland Revenue by 6 July after the end of the tax year
A vital feature of the self assessment system is the obligation it imposes on the tax payer to keep adequate and extensive records. This is in case the revenue needs to check the figures in your return.
You need to keep:
- Documentation of all your business transactions
- All receipts, bills bank statements and cheque stubs to support them up
- Make sure your separate your business and personal financial records
These records must be kept for five years starting from the date on which your annual Tax Return is due back.
If you become registered for VAT you will need to keep a record of all the supplies you make. Invoices normally form the basis of your VAT records. VAT records should be kept for a total of six years.
Although called self assessment there is no problem in hiring someone to complete your return. If you do decide to go down this road be aware that:
- They will need time to complete the forms and work out the figures
- They can only go on the information you provide. If you forget some important piece of information then it could have a negative impact
- Accountants do vary in quality, so it is good to go through the return at some stage to see if you agree with their figures