By Nick Thornhill, Direct and Partnerships Director, Hiscox
Becoming self-employed is an exciting but daunting time. 4.24 million people were self-employed as of July 2023. Self-starters and entrepreneurs can benefit from increased flexibility, but it’s important that they take steps to safeguard their assets and income. Whether you’ve chosen to pursue freelance work or start your own business, here are the five most commonly made mistakes you should avoid to ensure you operate within UK law.
- Failing to Register with HMRC: You’ll need a 10-digit code from HM Revenue and Customs (HMRC). This is your Unique Taxpayer Reference, and uniquely identifies you or your business. The code is used by HMRC whenever it’s dealing with your tax. You’ll need it to claim tax rebates and fill in a self-assessment tax return. Sometimes, clients will need it to confirm your tax status before you start working with them. You can apply online with HMRC. If you earn more than £1,000 per year from self-employment, you must register for self-assessment and complete a tax return each year.
- Not Understanding IR35 Rules: These rules determine whether you’re able to act as an off-payroll worker. If you fall inside IR35, it means that you’re working in a similar way to an employee and so should be paying the same amount of tax and making the same National Insurance contributions. If you’re unsure whether you fall inside or outside of IR35, check online at gov.uk. It’s important to understand the IR35 rules and how they could impact your working arrangements. Seek advice from an accountant or specialist contractor if you’re uncertain.
- Being Uninsured: At a minimum, you’ll need employers’ liability insurance if you’re a freelancer or business owner with staff members. It is a legal requirement if you have employees. You may also need professional indemnity insurance if you’re providing professional services.
- Not Separating Personal and Business Banking: It’s crucial to separate your personal and business finances, which means setting up a separate business bank account. Not only will it be easier to manage your finances, but you’ll also be able to keep track of expenses, helping to ensure that you pay the right amount of tax. When it comes to choosing a business bank account, compare different options to find the best deal for you. Consider fees, interest rates, and additional features like accounting software integration.
- Failing to Keep Records for Tax and Making Tax Digital: As a self-employed individual or business owner, you’ll need to keep accurate records of your income and expenses to make sure you pay the correct amount of tax. The UK government is also introducing Making Tax Digital (MTD), which means that all businesses will need to submit their tax returns digitally. You’ll need to use MTD-compatible accounting software to submit your tax return.