Tax implications of setting up as Self-employed/Sole Trader

Tax implications of setting up as Self-employed/Sole Trader
30th January 2018 Debbie

Self-employed or employed?

First of all you need to look at whether you are actually “self-employed” or an employee.

In considering this you need to look at:

  • Do you work for a number of people/organisations?
  • Are you engaged for individual services?
  • Do you have the right to substitute someone in your place?
  • To you take the risks and rewards of your business?
  • To you have your own business insurance?
  • Do you provide your own “tools” to carry out the work?

If the answers to above are yes then you are likely to be considered self-employed.

If the answers to only some are yes, HMRC may consider you employed.

Small amounts of income

If you are self-employed, from 6 April 2018, if your turnover is less than £1,000 you do not need to report it to HMRC – it is the same is for rental income. There is an “allowance” of £1,000 each for self-employment and rental income. If your total income from either is more than £1,000, you can claim a fixed £1,000 for expenses – instead of claiming actual expenses.

If you are self-employed (with income > £1,000) from 6 April 2017, you need to register as self- employed and report your income, expenditure and allowances for assets purchased on a tax return each year – together with details of any other income, expenditure and capital gains.

The tax return is required for the tax year that runs from 6 April one year to the 5 April the following year e.g. 2016-17 from 6 April 2016 to 5 April 2017. If submitted on paper it should be submitted by 31 October following the tax year, or following 31 January is submitted on line. So for 2016-17, 31 October 2017, for paper submission and 31 January 2018 on line.

Reporting to HMRC and payments of Tax and NI

Most sole traders elect to report their results for their business to either 5 April or 31 March – as it makes reporting easier. If you wish to use another reporting date, discuss it with your Accountant.

Payment should be made by the following 31 January of any tax, class 4 NI and class 2 NI due for the tax year e.g. for 2016-17 payment is due by 31 January 2018, less any payments on account made for that year for tax and class 4 NI e.g. payments made on 31 January 2017 and 31 July 2017. If amounts due for the year are > £1,000, then payments on account need to be made for the following year on 31 January and 31 July e.g. POA for 2017-18 (½ of 2016-17 liability) POA on 31 January 2018 and a similar amount on 31 July 2018.

For example – where the first period is for 2016-17


Total tax and class 4 for 2016-17 is                                             £3,000.00

Class 2 NI for 2016-17 is £2.80 pwk                                               £145.60

1st Payment on account for 2017-18 (½ of £3,000)                      £1,500.00

Total due by 31-1-18                                                               £4,645.60

2nd Payment on account for 2017-18 (½ of £3,000)

Due by 31-7-18                                                                        £1,500.00


Then tax return for 2017-18 is completed and:

Total tax and class 4 for 2017-18 is                                             £3,500.00

Class 2 NI for 2017-18 is £2.85 pwk                                               £148.20

Total                                                                                         £3,648.20

Less: POA for 2016-17                                                                £3,000.00

Due for 2017-18                                                                          £648.20

Payment on account for 2018-19 (½ of £3,500)                             £1,750.00

Total due by 31-1-19                                                                 £2,398.20


Due by 31-7-19  (½ of £3,500)                                                   £1,750.00


And so on………………


If you consider your actual tax will be less than the payments on account, you can apply for postponement of some or all of the POA. If it transpires that more is payable, interest will be charged from POA dates.

Class 2 NI is payable if profits are in excess of a limit for 2017-18 this is £6,025. It used to be paid monthly/quarterly but is now paid on the tax return with other amounts due on 31 January. Amongst other things it maintains state pension entitlement. You can voluntarily pay class 2 where your profits are less than the limit. To see whether it is worth volunteering, look at your contributions to date on:

Note class 2 NI is being abolished – it was to be from April 2018 but has been delayed to April 2019.

It is intended that class 4 NI will be reformed to take over the role of class 2 – it is currently effectively an additional “tax” that is paid at 9% on profits between £8,164 and £45,000 for 2017-18 and at 2% on profits above £45,000 (2017-18).


Something you also need to keep track of is your monthly vatable supplies – whether they exceed the limit (currently £85,000 for 2017-18 and 2018-19) for the last 12 months, or likely to exceed the limit in the next 30 days, you have 30 days to advise HMRC that you are liable to be registered.


Note if you are late in notifying HMRC you will be liable to penalties and the amount of VAT that should have been paid………………………which you are unlikely to be able to recover for any customers that are not VAT registered.

Cash Basis

If your turnover is less than £150,000, for all self- employments, you can elect to use the cash basis – which would have to be applied to all self-employments. There are certain specialised categories that cannot use this basis – see your Accountant for details. Once in the scheme you can stay until your turnover exceeds £300,000.

Basically under this basis you would use receipts and payments in the accounting period rather than the accruals basis – based on items that occurred in the accounting period, regardless of date of payment.

For assets, other than cars, you can claim the amount paid as an expense deduction and capital allowance, under the normal rules, for cars. As you can currently claim Annual Investment allowance on non-car business assets anyway, up to £200,000, the cash basis is not likely to offer any advantages on business assets.

The other dis-advantage is that losses in the first 4 years cannot be carried back and offset against other income of the last 3 years, or offset against other income in the same year. They can only be carried forward and offset against profits of the same trade – reducing the possibility of tax refunds.

Up to £500 can be claimed on interest – which does not have to be a loan to the business.

There is no adjustment for stocks held at the period end under cash accounting.

Those going in/out of the scheme have to comply with special requirements to ensure items are not taxed or tax deductible twice – speak to your Accountant.

Making Tax Digital

Please look at separate postings on this subject.

Basically it is coming in in April 2019 – but only for VAT registered businesses that need to be VAT registered – i.e. have not voluntarily registered, and for VAT purposes only.

It is not going to come in for other business until April 2020 at the earliest. Which is likely to affect sole traders and landlords with turnover > £10,000 pa.

Other matters to consider

  •  Have you taken out the appropriate insurance?
  • Are you going to employee people? Need to ensure you comply with PAYE regulations and auto enrolment and minimum wage requirements;
  • If you are using subcontractors – are they self-employed or might HMRC consider them employees? See above;
  • How will you market your services/goods? Local networking groups? Advertising?
  • Do you need to set up a Website?
  • If you are likely to suffer losses in the first four years it is probably best to set up as self-employed initially as tax relief is better. You may wish to consider setting up or move at some point to a limited company – this is something to discuss further with your Accountant.