As a resident in the UK, you must pay tax on all your earnings. When you are employed, your employer takes tax, national insurance and in many cases pension contributions from your salary before sending the remaining amount over to your bank account. As you receive your pay net of the relevant deductions, it’s understandable that many people start a side business, they forget that they will need to declare their earnings to HMRC and potentially pay tax on any profits.
When you start trading, you have responsibility to return information to HMRC regarding your earnings so that you can be taxed properly but let’s have a look at when you need to register.
You must register with HMRC no later than 5th April in your business’s second tax year. For example, if you started trading between 6th April 2020 and 6th April 2021, then you’ll need to register with HMRC by 5th October 2021.
WHAT IF I’M LATE?
If you started trading before 6th April 2020, you will want to pick up the phone. Who you call will depend on how much tax you think you will owe.
If it is a very minimal amount or none (because you don’t have any other income that takes you over the personal allowance* or you didn’t make any profit for example) then call HMRC.
They are generally not a problem if you go to them and say you didn’t realise you had to register, you happened by an article and found out that you should have been registered and you’ve given them a call straight away.
Don’t take that as gospel, but if THEY find that you’ve been running a business without registering and they have to approach you, they will likely impose penalties.
They do not accept “I didn’t know” as an excuse, but if you are cooperative as you can be and provide all the information, they need to assess your earnings, then that will help to reduce any penalties that they are entitled to apply.
If you self-declare that you should have been registered but weren’t, you will get into a lot less trouble! They will ask you when you started trading (so make sure you have that date ready) and ask you to complete however many returns you should have completed by this point.
However, if you are likely to have had a lot of tax arise from the income you’ve not declared over several years, you will want to call us. We will be able to help you put your missing records together and submit the information to HMRC while minimising penalties and interest as much as we can.
WHAT IS THE £1000 TRADING ALLOWANCE?
You may have heard about the £1000 trading allowance. There are a lot of miscommunications about this, so we’ll go through it
The first important point to note:
The £1000 is turnover, not profit.
If your turnover is below £1000 you don’t have to register for self-assessment in order to claim the trading allowance – unless you already need to be registered for another reason.
If you are already registered, but still qualify for the allowance, you can claim the trading allowance on your-self assessment Tax Return INSTEAD of claiming your business expenses. You will still need records showing your turnover…i.e all your invoices or statements from >Insert sales platform or payment collection service here<
If you are employed and you sell anything to your boss, then you disqualify yourself from claiming the allowance. Colleagues are ok, but not your boss.
If you have more than 1 business earning self-employed income , this £1000 is across the board for ALL your self employed income – not for each one.
If you qualify for the allowance, but look like you are going to make a loss for the year with your income less all your claimable expenses, you will be better off registering the loss so you can offset it against future profits rather than claiming the allowance.
If you want to be able to pay class 2 NI contributions, you will need to register and submit the self-assessment.
If you want to claim Tax Free Childcare for childcare costs based on your-self employment income you will need to register and submit the self assessment.
If you want to claim Maternity Allowance, based on your self-employment income you will need to register and submit the self assessment.
*Personal allowance in 20/21 was £12,500, in 21/22 it is £12,570