Freelancers' Questions: Do I still need to be self-employed?

Freelancer’s Question: I have been registered with HM Revenue & Customs as self-employed for the past three years, working mainly for one company as a designer. I lost that work at the start of the year and now only do a few days work a month, totalling around £300 per calendar month.

But I am now going back to education and, while I will continue to do this work, I will probably only have time to earn around £150-£200 pcm. Such a small sum hardly seems worth it once I have paid my national insurance which is £65 each payment, and worked out my tax.

I wonder, do I still need to be self-employed, or can I just do a few hours work each month without having to be?

Expert’s Answer: The short answer to your question is that yes, you do still need to be registered as self employed. HMRC provide guidance on many ‘badges of trade’ which are indicators that you are self-employed; two of these being ‘profit-seeking motive’ and ‘number of transactions’, both of which seem to apply in your case.

That’s the bad news, so let’s see what can be done to mitigate the amount of tax and NI to be paid!

Firstly, you mention maximum possible earnings of £200 pcm and I would also expect you will have valid business expenses to deduct from this income. Even without a deduction for expenses, profits of £200 pcm will give you an annual income of £2,400 which is less than the Personal Allowance (£8,105 for 2012/13). So, assuming this is your only source of income, you will not have any Personal Tax or class 4 NI to pay, come January 31st.

Added to this, you could consider applying for a Small Earnings Exception (SEE). In this current tax year, if your profits are below £5,595, you can apply for the small earnings exception (PDF) which, if approved, means you could stop paying Class 2 NI Contributions, the £65 payment twice per year that you mention.

However, please consider this very carefully, as you may then lose your entitlement to the benefits these contributions count towards including, Employment and Support Allowance, Basic State Pension, Bereavement Benefits and Maternity Allowance.

Finally, have you considered applying for tax credits or benefits? Since the hours you have spare to work each week are likely to be less than 30 you wouldn’t qualify for working tax credits, however dependent on your home circumstances you may be able to claim for Income Support, Housing Benefit, or possibly an exemption from Council Tax; it’s worth looking in to.

Good luck with your studies, hopefully once they are over, your new skills will ensure you are in great demand and your earning potential will increase!

The expert was Diane Holden, business manager at FW Accounting, a specialist accountant for freelancers, contractors and the self-employed.


12th September 2012

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