© Chartered Institute of Taxation 2019

Is it self-employment income?

If your activity is regular, organised, done with a view to generating a profit and continues for at least a few months, then this will put you within the realms of ‘trading’ and thus, self-employment. Income from one-off jobs or very casual work may be taxable as miscellaneous income rather than self-employment income (more on this later).

All the facts and circumstances will need to be considered when deciding the 'nature' of the income. You can find more information in the GOV.UK guidance: www.gov.uk/working-for-yourself/what-counts-as-self-employed

The ‘gig’ economy is tempting more people to earn extra cash by using one of the many available online platforms to offer rides, run errands, make deliveries or do something else. Although this is a developing area of the economy, there are some important tax issues to be aware of.

The starting point is that the income derived from such jobs is usually taxable (unless it comes in at less than £1,000, in which case it may not be) – even if you receive cash as payment or do it as a side job. It gets more complicated when you factor in things like deductible expenses, tax allowances, record-keeping requirements and National Insurance contributions (NIC). Here we tell you the main things you need to know.

Tax and NIC for the self-employed

People who have self-employment income are responsible for reporting and paying their own tax and NIC to HM Revenue & Customs (HMRC), via the completion of a Self Assessment tax return. A tax return is a legal document and a reconciliation of all your taxable income and gains. It is important not to leave out any income (unless it is fully covered by the trading allowance – see later), no matter how small and no matter whether tax at source has already been operated, e.g. Pay As You Earn (PAYE) tax.

You can complete your tax return online and if you do, you usually have to submit it and pay anything that you owe to HMRC by 31st January following the end of the tax year in question. From your second year of trading, HMRC may ask you to make payments on account. These are estimates of what your tax bill will be at the end of the year, based on the previous year’s return – be sure to set aside enough money to pay them (if you need to).

The tax return form has a section for self-employment income and expenses (more on expenses later). Keeping up-to-date records on your income and expenses from the start is important as it makes it easier to complete your tax return. If you do not keep adequate records or complete your tax return correctly or on time you may have to pay a penalty.

If you have self-employment income, it will be necessary to complete a tax return even where your total level of income means that there is no tax or NIC due (unless your self-employment income is fully covered by the trading allowance). You can find the thresholds for tax and NIC on our website at: www.litrg.org.uk/useful-links/tax-and-nic-rates

Strictly Class 2 NIC (the type of NIC that self-employed people pay to gain access to the benefits system) are only payable if your profits are over £6,365 (in 2019/20) however you can pay them voluntarily if your profits are below this amount. They are payable at a flat rate of £3.00 per week (in 2019/20). Class 4 NIC contributions are also due at 9% on profits over a certain level. Class 4 contributions do not count towards any benefits however you still have to pay them!

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Registering as self-employed with HMRC

By law, newly self-employed people must notify HMRC by 5 October in the tax year following that in which their activity began or risk a penalty (unless their income from it is fully covered by the trading allowance – see later). For example, if Niall begins trading in the tax year 2019/20 (which runs from 6 April 2019 to 5 April 2020), he must tell HMRC by 5 October 2020. The easiest way to do this is to fill in the form CWF1: www.gov.uk/log-in-file-self-assessment-tax-return/register-if-youre-self-employed

If you are already in the Self Assessment system, you may still need to tell HMRC about your gig economy income by completing form CWF1 and then including it on your tax return – but, again, see the section on the trading allowance for an exception to this.

Where the 5 October deadline is missed, a person should still register ASAP. As long as a tax return is submitted and any money due is paid on time (normally by the following 31 January), there should be no potential lost revenue and no penalty to pay.

What do I have to pay tax and NIC on?

You only pay tax and NIC on your ‘profit’ – so if your income is £5,000 a year and you have £200 of business expenses, you would only pay tax and NIC on £4,800.

When calculating your profit, you can take into account any expenses ‘wholly and exclusively’ paid out for the purposes of your business, such as car, van or other travel expenses and administrative costs, including mobile phones. If you use something for both business and private purposes, a mobile phone or vehicle for example, you should keep evidence – mobile phone bills/mileage logs, etc. so that the appropriate percentage of business use can be identified. You may be able to claim a round sum amount equal to the ‘trading allowance’ for your business expenses instead of the actual business expenses you have incurred (more on this later).

The amount of tax you pay on your profit depends on what other income you have, for example, if Raj has an employment in which he earns £7,000 but also has a gig economy profit of £3,000, he will pay 0% tax on it, as his total income does not exceed the £12,500 tax-free personal allowance (2019/20). But if he has an employment in which he earns £20,000 and £3,000 profit, he will pay 20% tax on the £3,000 profit, so £600.

Ceasing self-employment

You should tell HMRC when you cease self-employment otherwise they will just assume that your self-employment is ongoing and will continue to expect tax returns from you. You can do this here: www.tax.service.gov.uk/shortforms/form/CeaseTrading. You will need to fill in a tax return for the year your self-employment ends – the exact date that you stopped being self- employed should be given (this will also help make sure you do not overpay Class 2 NIC).

Miscellaneous income

‘Miscellaneous’ catches income which does not fall within any other category, for example employment or self-employment. If you require more information on miscellaneous income, you could look at HMRC’s manual: www.gov.uk/hmrc-internal-manuals/business-income-manual/bim100000

You will need to tell HMRC about any miscellaneous income payments (unless they fall under the trading allowance – see later), but you may not need to complete a tax return if HMRC are able to collect any tax owed through another way – for example, by adjusting your PAYE tax code (if you have one). You can find HMRC’s contact details here: www.gov.uk/government/organisations/hm-revenue-customs/contact/income-tax-enquiries-for-individuals-pensioners-and-employees

If the income is ‘miscellaneous’, you cannot pay Class 2 NIC. Unless enough NIC or NIC credits will be put on your record any other way, you may wish to consider making voluntary Class 3 NIC. These are quite expensive at £15 a week (in 2019/20), so before committing yourself, you should consider if it is necessary to make them, taking account of how many qualifying years you have already and your future potential to make up any gaps. You can check how many qualifying years you have already through your Personal Tax Account: www.gov.uk/personal-tax-account. You can usually pay Class 3 NIC within six tax years so you can delay payment if you are uncertain for now.

What is the trading allowance?

A trading allowance has been introduced for the 2017/18 tax year onwards to exempt trading and/or miscellaneous income of up to £1,000 per tax year from income tax. This might include income from the gig economy or from selling things online (more on this later).

If your total trading or miscellaneous income (before expenses) is less than £1,000 then you have no taxable income from the activities. This means there is no need to include the income on a Self Assessment tax return (referred to as full relief). So, if Freddy usually completes a tax return because he has employment expenses that he claims tax relief on, and in 2019/20 starts doing a few odd jobs in the gig economy, then provided the income from this is less than £1,000 he doesn’t need to pay any tax on it or tell HMRC about it in his 2019/20 tax return.

Similarly, if Jax has trading or miscellaneous income of less than £1,000 for 2019/20 but is not already in the Self Assessment system, there is no need for her to register for Self Assessment in these circumstances. (If Jax had previously been in Self Assessment then she should contact HMRC to check whether she is still required to file a 2019/20 tax return, she should not assume that she will not have to as this could result in late filing penalties.)

If Jax’s income is over £1,000 and it is trading income then she must register for Self Assessment as a self-employed person. Continued…..

What is the trading allowance? (continued…)

Jax can then choose to deduct the trading allowance from the income instead of deducting her actual business expenses for the period (this is called a partial election). If she does this, the taxable profit from the activity will simply be the total income less the trading allowance. So, if Jax has total income of £1,700 from selling home-baking at local monthly farmers markets in 2019/20, and she decides to claim the trading allowance, her taxable profit from this is £700.

It would be beneficial to claim the trading allowance in this way if you do not have very many expenses related to the activity (for example, less than £1,000). It will still be necessary to keep good records, so you know what your income and expenses are to be able to work out whether or not you wish to claim the trading allowance. You can find out more about the trading allowance on our website: www.litrg.org.uk/tax-guides/self-employment/what-trading-allowance

It is important to note that an individual who has an established self-employment who starts up a smaller second trade may be unable to benefit from the trading allowance as their combined income from both trades is likely to exceed £1,000 and partial relief will not be attractive as the individual will be prevented from deducting the expenses incurred in their main trade.

Also, even if you do not have to report this income to HMRC you may still need to report it for some means tested benefits, such as universal credit (although not for tax credits) – more on this later.

What employment rights am I entitled to?

Gig economy workers have traditionally been classified as self-employed for employment law purposes. A ‘genuinely’ self-employed person is their own boss and so needs no protection under employment law. But this view has been challenged recently by individuals claiming they should be reclassified as ‘workers’ for employment law purposes, meaning that they are entitled to a core set of rights and protections including the minimum wage and paid holidays.

A person may be a ‘worker’ where they provide a service but as part of someone else’s business and where they must carry out the work personally rather than send someone else in their place. GOV.UK contains further information on employment rights for ‘workers’: www.gov.uk/employment-status/worker

If you need help understanding your employment law status you can contact ACAS for confidential and free support and advice: www.acas.org.uk/index.aspx?articleid=1461

It is worth noting that even if you are classified as a ‘worker’ under employment law, you will not become entitled to statutory sick pay or any other statutory payments for that matter, for example statutory maternity pay, etc. This is because currently, most gig economy workers do not have their pay dealt with under the PAYE system (and therefore do not have a ‘secondary contributor’ – that is, an employer to pay employer National Insurance) and this is the trigger for such payments to be made. Maternity allowance or employment and support allowance may be available instead from the Department for Work and Pensions (DWP).

Should I operate through a limited company?

You may have heard about supplying your services through your own limited company as a way of saving some tax. Setting up a limited (Ltd) company is very different from just being 'self-employed'.

A business which is run as a Ltd company will be owned and operated by the company itself. The company is recognised in law as having an existence which is separate from the person who formed the company and from the directors/shareholders. A company is liable to corporation tax on all 'profits'. A company must file accounts in a specific format to Companies House and file corporation tax returns to HMRC.

In your personal capacity, you will be a director/shareholder of the Ltd company and also the person that the company hires out to provide services (you would usually set yourself up as an employee of the company to do this) so may be receiving income from the company in the form of a salary and/or dividends. In this situation the enterprise you work for must pay the company for its services, usually on production of an invoice (they should not pay you directly). The Ltd company will have to run a payroll to process your salary correctly under PAYE and you should be completing personal tax returns to declare such income and pay any income taxes.

There is information on running a limited company on GOV.UK (www.gov.uk/running-a-limited-company), however this generally may not be a suitable way to trade for the low-paid business owner because of all the administrative considerations.

Am I entitled to any benefits?

The main ‘in work’ benefits are tax credits and universal credit (UC). For tax credits purposes you generally need to spend sufficient hours in paid work, for example 16, 24 or 30 hours per week depending on your circumstances, in order to qualify. Your gig economy hours alone may reach the relevant threshold, or they may do so when they are added to any other working time you have.

One important thing to note with regards to tax credits is that even if you meet the hours test, a ‘self-employed’ claimant faces a test of whether their self-employed activity is carried on upon a commercial basis with a view to making a profit and is organised and regular. You may need to provide documents like a business plan, customer lists, or marketing materials to HMRC so that HMRC can check your claim. You can read more about this on our specialist website: https://revenuebenefits.org.uk/tax-credits/guidance/how-do-tax-credits-work/self-employed/#Self employment and tax credits

Tax credits are being replaced by UC and you may now have to claim UC. You do not need to work a set number of hours under UC like you do for tax credits, but there is a ‘gainful self-employment test’ (a bit like the test in tax credits) and if you are not ‘gainfully self-employed’, you are likely to have some work-related obligations as part of your claim (unless you are formally deemed to have no work requirements). DWP will look at things like whether self-employment is your main occupation, how many hours you spend undertaking self-employed activity and how much you are earning from it. If they decide you are gainfully self-employed, you should be aware that the Minimum Income Floor (MIF) may apply after 12 months of starting self-employment, meaning that UC payments will be made based on an assumption that you are earning a certain amount from your self-employment (even if that is not the case, for example because of unexpected fluctuations in income). You should also be aware that there is an obligation to report earnings on a monthly basis once UC payments start to be received. You can find out more about UC and self-employment on our specialist website: https://revenuebenefits.org.uk/universal-credit/guidance/entitlement-to-uc/self-employment/

What if I am selling things online/renting out my property?

If you sell things online, you may need to pay tax. The key consideration is whether you 1) regularly sell things you have bought or made specifically to sell on, or 2) whether you occasionally sell things you do not need any more or because you want to clear some space.

If your activity falls under point 1, then HMRC will consider that you are trading and you should complete a tax return like any other self-employed individual. Those running their business from home may be able to claim a tax deduction for an appropriate proportion of home related expenses such as heating, lighting, power, maintenance, cleaning and council tax or use the flat rate simplified expenses (there is more information on our website: www.litrg.org.uk/tax-guides/self-employment/working-out-profits-losses-and-capital-allowance/what-business-expenses#toc-is-there-an-easier-way-to-deal-with-home-expenses-)

Even if your online selling does not amount to trading, you may be subject to capital gains tax. Many sales of personal items will be exempt from capital gains tax, but some items (for example, antiques, jewellery and paintings) sold for more than £6,000 could result in a charge. There is a basic guide to capital gains tax on our website: www.litrg.org.uk/tax-guides/other-tax-issues/capital-gains-tax

Renting out an owned asset, for example your driveway, your car or your home may also be generating you taxable income – but this will be taxed as property income rather than trading income. A similar £1,000 allowance to the trading allowance (see above) is available for property income, this is called the property allowance. Please note that this is not available to use against income from renting out a room in your house, however people who let part of their home are able to claim the rent-a-room allowance which exempts rent of £7,500 or less from income tax. You can find out more about property income and rent a room relief on our website: www.litrg.org.uk/tax-guides/other-tax-issues/property-income/renting-out-property

This factsheet is intended to provide general information only and does not constitute advice. Before taking any action, you should get appropriate immigration, benefit or tax advice from a professional adviser which is based on your particular circumstances. We have done our best to ensure that the information in this factsheet is up to date as of April 2019. You can read our full disclaimer on our website: www.litrg.org.uk/legal.

This factsheet was written by the Low Incomes Tax Reform Group. Everything we do is aimed at improving the tax experience of low income workers. LITRG do not offer an advice service, but our website is full of general helpful tax information, including lots more on the Self Assessment system for the self-employed: www.litrg.org.uk/tax-guides/self-employment