What does being self-employed mean?
Being self-employed means you will be responsible for your own tax and National Insurance contributions. You are legally obligated to file a tax return each year to HMRC to show how much you've earned and how much tax you owe.
How does the tax year work?
The tax year runs from 6th of April to the 5th of April the following year. Each year you will have to fill out a tax return to show HMRC your earnings. You can go here to submit one.
Tax returns must be filed by January 31st of the following year. Here's an example below to explain how it works:
You start working as a tiney home nursery owner in January 2020. Because you started 3/4s of the way through the tax year, your first tax return will be from January 2020 - April 5th 2020 (the end of the tax year). You will need to submit this tax return before January 31st 2021.
You next tax return will be from April 6th 2020 - April 5th 2021. You will need to submit this the following year before January 1st 2022.
How to register
You can go here to register online for self assessment. You will need your National Insurance Number when registering.
Once you have registered as a sole trader, you'll be sent your Unique Taxpayer Reference. You need this to access you online HMRC account.
Please ensure that you keep all of your tax documents together somewhere safe as you will need to refer back to them regularly.
How much tax will you owe?
This depends completely on how much you earn! The more you earn, the more tax you pay.
Currently, the tax-free Personal Allowance is £12,500. That means if you earn less than this, you do not have to pay any tax. Anything above that, you will pay 20% of tax on.
So if you earn £13,000 during the tax year, you don't have to pay tax on the first £12,500. You would then only pay 20% tax on the £500 above the tax limit, which means you would owe £100 in total.
You will still have to fill out a tax return if you don't owe any tax, however, as you will owe National Insurance (this is much less)
Here's the HMRC's explanation of the different tax brackets - worth a quick a review.
Putting away money for tax
The challenge with only paying your tax the year after is that you have to be diligent about putting money away. It's all too easy to not bother and then get hit with a large tax bill at the end of the next financial year.
Each month, make sure to put a portion of your earnings away for tax. This avoids any awkward scenarios where you can't pay your tax bill and then get fined for the pleasure!
Make sure you track all of your expenses - it will be much easier if you do it at the point of expenditure (when you spend it!) rather than year end. From the very first resources you buy, make sure to keep the receipts!
You can use a simple spreadsheet on Microsoft Excel or Google Sheets to keep track. There are also apps available that allow you to snap a picture of a receipt and it uploads directly into an account for you. The one we use here at tiney is Receipt Bank.
Childminders have a special dispensation with HMRC, which means that any expenses below £10 do not have to be receipted back, but can still be claimed as a business expense. So keep track of these - they really add up over time!
Childminders are also allowed to claim back a percentage of their essential utilities, dependent on their income. The more hours you work, the higher of a percentage you can claim back:
Utility expenses table
Check out HMRC's self-assessment website or give them a call - the numbers are on the website and they are super helpful.
We recommend having a look through the HMRC business income manual - it's useful when thinking about your tax return.