Contractors' Questions: What about freelance income before I registered?

Contractor’s Question: I'm about to register for self-assessment and National Insurance Contributions, having received a couple of cheques from work I've completed over the past couple of years.

So, these earnings will probably go into my bank account after I register as self-employed. I assume that’s OK? In other words, will there be a problem with this income being earned before registration with HMRC? I'm guessing that the date the money goes into the bank is what really matters, but I just want to see what an accounting expert would recommend.

Expert’s Answer: You mentioned the earnings will be banked after you’re registered, but that they relate to work carried out previously. If it’s all within the current tax year (06/04/2011 - 05/04/2012), then you can register with HM Revenue & Customs now and declare the income on your 2011/12 tax return. Apply online, or give them a call, but ensure you have your NI number to hand. Any tax due for 2011/12 will be payable by 31/01/2013, with payments on account if you have a liability over £2,000.

If the income was earned in a previous tax year, then you’re past the deadline for registration, and HMRC may issue a penalty. The latest you can register is October 5^th after the end of the tax year for which you need a return. If you have tax to pay in the 2010-11 tax year, you should have told HMRC by October 5^th 2011. If this is the case, let them know when you register for the current year. If the income doesn’t result in any liability, HMRC shouldn’t impose any penalty.

The self-employed also have to pay Class 2 NI, at a rate of £2.50 a week. Depending on expected level of income, you could apply for a small earnings exception certificate -provided your self-employed income stays below £5,315, you have no Class 2 liability.

We help our clients be tax efficient, thereby reducing the risk of penalties on late payments and overdue returns. I recommend you seek guidance from a specialist contractor/freelancer accountant, who will advise you of your options.

The expert was Clare Rickman, of InTouch Contractor Accounting, a tax and accountancy specialist for freelancers, contractors and the self-employed.