Self employed people are responsible for calculating and paying their own income tax and National Insurance Contributions. If you are self employed you will need to complete and return an annual self assessment in order to determine how much tax you need to pay.

Informing HM Revenue and Customs

To begin with you must register as self employed. You must do this within three months of the end of your first month of self employment. If you miss this deadline you risk incurring a financial penalty.

Once you are registered as self employed you will receive an annual self assessment form from HM Revenue and Customs. Our guide to self assessment gives more details on how to fill in the form.

National Insurance Contributions

Self employed people pay National Insurance Contributions (NICs) in a different way to employees. You will pay Class 2 NICs at a flat rate if your annual earnings exceed £5,075. Class 2 NICs are currently charged at £2.40 per week for 2009-10, and count towards benefits like the State Pension.

Class 2 NICs do not count towards the additional State Pension, Jobseekers Allowance, or Statutory Sick Pay. You should make your own private arrangements for pensions and income protection.

In addition, if your annual earnings exceed £5,715 you will have to pay Class 4 NICs. These are charged at 8 per cent of all income between £5,715 and £43,875, and 1 per cent over this amount.

Click here for more information on self employed National Insurance.

VAT registration

If your annual turnover exceeds the VAT registration threshold (currently set at £68,000), you will need to register for VAT. However, in some cases it is beneficial for businesses to register for VAT voluntarily, even if their turnover is below the threshold. See our article on VAT registration for more information.