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Register with HM Revenue & Customs (HMRC)

It's important to let HMRC know that you're self-employed as soon as possible - even if you already fill in a tax return each year. If you don't tell them within three months of the end of your first month in business you could face a penalty test.

You can register by:

• More about setting up and registering as self-employed Opens new window
• Download leaflet: 'Thinking of working for yourself?' (PDF document, 243K) Opens new window
• Help with PDFs
• The cost of contacting 08 and 03 telephone numbers

Income Tax and Self Assessment

Once you're registered as self-employed, you'll be a Self Assessment taxpayer. You'll have to fill in a tax return each year and give details of your earnings and any other income you get. This information is used to work out how much tax you have to pay.

• Understanding Self Assessment
• Self Assessment for the self-employed Opens new window
• How to file your tax return online

National Insurance contributions

Class 2 National Insurance contributions

Class 2 National Insurance contributions count towards certain benefits, like State Pension, Maternity Leave and Bereavement Benefit.

You pay Class 2 National Insurance contributions at a flat rate of £2.40 a week (2009-2010) if your earnings are above £5,075 per year. You can choose to make your payments either quarterly or by monthly direct debit.

Bear in mind that Class 2 National Insurance contributions don't count towards the additional State Pension, Statutory Sick Pay or Jobseeker's Allowance, so you might want to think about making other arrangements like a personal pension and income protection insurance.

You can register for Class 2 National Insurance contributions when you register as self-employed, or by completing the form at the back of the leaflet: 'Thinking of working for yourself?'.

• Download leaflet: 'Thinking of working for yourself?' (PDF document, 243K) Opens new window
• Help with PDF files

Exceptions to paying Class 2 National Insurance contributions

If you earn less than £5,075 per year you can apply for a certificate of small earnings exception and not pay Class 2 National Insurance contributions. However, you might decide to carry on paying them voluntarily to keep your entitlement to the State Pension and other benefits.

• Download Small Earnings Exception help notes and claim form CF10 Opens new window
• Help with PDF files

Class 4 National Insurance contributions

The amount of Class 4 National Insurance contributions you have to pay for any tax year is based on your profits for that year. You pay eight per cent on annual profits between £5,715 and £43,875 and one per cent on any profit over that amount.

You work out your Class 4 National Insurance contributions on your tax return and pay them alongside your Income Tax. Class 4 National Insurance contributions don't count towards benefit entitlements.

• More from Business Link about National Insurance contributions for self-employed people Opens new window
• National Insurance rates and thresholds on the HMRC website Opens new window

Value Added Tax (VAT)

If your business turnover is more than the VAT threshold (currently £68,000) you'll normally have to register for VAT. Even if your turnover's below the threshold it might benefit your business to register voluntarily.

If you have an accountant they will be able to advise you or you can ring HMRC's National Advice Service Enquiry Line on 0845 0109 000 open from 8.00 am to 8.00 pm Monday to Friday.

• When to register for VAT - interactive tool Opens new window
• VAT - introduction to VAT Opens new window
• The cost of contacting 08 and 03 telephone numbers

Record keeping

Legally you have to keep records for your business and for any other income you get. This is so you can fill in your tax return and show that the figures are right. You'll need to keep at least:

Good records will also save you time and help you run your business more efficiently.

• Setting up a basic record keeping system Opens new window
• Self Assessment record keeping Opens new window

More useful links

• The No-Nonsense Guide to setting up your business Opens new window
• Capital Gains Tax relief on your own home Opens new window