Step-by-Step Guide to Stop Being Self Employed: Simplify Your Career Transition
If you’re considering to stop being self employed, you may be seeking stability, nearing retirement, or looking to escape the financial roller coaster. Whatever your reasons, the transition out of self-employment requires thoughtful planning and astute handling of tax, finance, and regulatory matters. Navigate your exit with confidence and clarity: This guide breaks down the essentials, from managing taxes to tying up loose ends, you’ll learn how to close this chapter smoothly and step into the next.
Overview:
- Deciding When to Stop Self-Employment
- How to Notify HMRC of Your Decision
- Completing Your Final Self-Assessment Tax Return
- Managing Business Assets and Liabilities
- Dealing with VAT and PAYE Responsibilities
- Handling Employee Redundancies and Obligations
- Insolvency Considerations
- Post-Deregistration Responsibilities
- How Professional Services Can Assist in Deregistration
Deciding When to Stop Self-Employment
Choosing to stop being self-employed is as personal as the decision to start. Several factors might contribute to this decision, whether it’s the allure of retirement, the stability of traditional employment, or the challenge of financial difficulties.
You might be considering transitioning into full-time employment for various reasons, such as:
being on the brink of retirement
experiencing burnout
facing financial stress
dealing with high final tax bills
Transitioning into full-time employment is a legitimate and often appealing choice for many individuals.
Retirement
Retirement is a significant milestone and a common reason for ending self-employment. Preparing for retirement involves considerations like allocating income towards retirement, minimizing high-interest debt, and understanding the costs of transitioning from self-employment to retirement.
Retirement income, including pensions, is typically taxable, but there are options for tax relief through tax returns. It’s crucial to consider your final profit from self-employment and how it impacts your retirement savings and tax obligations.
Full-Time Employment
Another path away from self-employment is the transition to full-time employment, which may be an option for those who are no longer self employed. This transition comes with its own challenges and benefits, like adapting to a reduced level of control and a new daily schedule. Remember, being employed doesn’t alter your tax status as you can be both employed and self-employed concurrently.
Transitioning to full-time employment could provide job security and a steadier income, though at the cost of the autonomy and flexibility that comes with self-employment.
Financial Difficulties
Financial difficulties, such as fluctuating incomes, financial stability concerns, and the complex task of handling personal finances can prompt some self-employed individuals to reconsider their status. If the challenges outweigh the benefits, it might be time to seek the stability of a salaried position. In such cases, several support options are available, such as support for tax liabilities, free debt advice, and assistance from government and local councils.
Taking immediate measures such as creating an emergency fund and obtaining professional financial advice can pave the way for financial recovery.
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How to Notify HMRC of Your Decision
Informing HM Revenue and Customs (HMRC) is a crucial part of ending self-employment. It’s crucial to inform HMRC about the cessation of self-employment to avoid unnecessary future Self Assessment tax return obligations. Two primary methods can be used to inform HMRC of your decision: completing an online form via the government gateway or contacting the Construction Industry Scheme (CIS) helpline.
Regardless of the method you opt for, you’ll have to furnish your National Insurance number and UTR (Unique Taxpayer Reference) number.
Online Notification
Notifying HMRC of your decision online is a straightforward process. You can log into HMRC’s online services using your User ID and password and follow the instructions on the ‘stop being self-employed’ section on GOV.UK. It’s recommended to notify HMRC on April 5th, aligning with the end of the tax year, especially if your earnings are £1,000 or less.
In addition to the online notification system, individuals can complete a VAT 7 form to cancel their VAT registration.
Phone Notification
Alternatively, you can contact HMRC via phone to notify them of your decision to stop being self-employed. You’ll need to provide details such as tax codes, information related to tax refund claims, and evidence of employment history.
It’s advisable to contact HMRC early in the morning, preferably on a Thursday or Friday, to report the cessation of self-employment.
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Completing Your Final Self-Assessment Tax Return
Completing your last Self Assessment tax return is a critical component of the deregistration process. Completing and sending a final tax return is necessary when deregistering from Self Assessment. The deadline for the final Self Assessment tax return aligns with the regular tax return submission deadline.
As you finalize your tax return, you may have access to overlap relief, terminal loss relief, and other reliefs aimed at reducing Capital Gains Tax. If you need assistance, engaging a professional to aid with your tax return is a viable option.
Trading Income
Your trading income, or the income from your business, needs to be reported on your final tax return. In the UK, trading income of up to £1,000 per tax year is exempt from income tax and National Insurance. Taxable profits for trading income are derived from the profits reported in your business accounts, after making necessary adjustments to adhere to tax regulations. It’s important to note that you can’t claim expenses if you use the £1,000 tax-free ‘trading allowance’.
If you have foreign trading income, you should report it in the ‘foreign’ section of the tax return and claim the Foreign Tax Credit if income has already been taxed abroad.
Expenses and Allowances
Expenses and allowances are another important aspect of your final tax return. In the UK, it’s allowable to deduct business expenses from your trading income. However, you can’t claim expenses if you use the £1,000 tax-free ‘trading allowance’. It’s recommended to calculate home office expenses using a flat rate based on the hours worked from home each month. Keeping track of these expenses can help you better understand your estimated tax bill.
You can also include accommodation, food, and drink expenses incurred while away from your permanent workplace as travel and subsistence allowances on your final tax return. However, personal expenses, non-business related entertainment expenses, fines, penalties, and capital expenditures are not deductible on a self-employed tax return.
Capital Gains Tax
Capital Gains Tax is another item to consider in your final tax return. Capital Gains Tax is determined by the profit from selling an asset or property, with different rates for gains from residential property and other chargeable assets. To calculate capital gains tax, you need to determine the gain by subtracting the original cost from the sale proceeds. Deductible costs include the cost of purchase, improvements to the asset, and incidental costs of sale.
Assets that are liable to capital gains tax include any assets that have appreciated in value and are subsequently sold or disposed of. Remember to report capital gains tax on your self-assessment tax returns by disclosing the taxable gain and the corresponding tax liability.
Managing Business Assets and Liabilities
Upon deciding to cease self-employment, managing your business assets and liabilities becomes necessary. This includes selling assets, paying off debts, and closing accounts. Remember, you may need to pay Capital Gains Tax if you sell or dispose of business assets.
It’s also crucial to settle any outstanding business debts before ceasing self-employment. Lastly, when closing your business accounts, it’s essential to inform HM Revenue and Customs (HMRC) of the cessation of trading.
Selling Assets
Choosing to cease self-employment may necessitate selling off your business assets. This process involves assessing the valuation of the assets, promoting them for sale, negotiating with interested parties, and transferring ownership. You’ll need to report the sale to HMRC by paying Corporation Tax and calculating chargeable gains.
There are several reliefs available such as roll-over relief, entrepreneurs’ relief, and business asset disposal relief when selling business assets.
Paying Off Debts
Before leaving self-employment behind, it’s vital to clear any lingering business debts. As a sole trader, you have personal liability for all business debts, and failure to repay them may jeopardize personal assets. You can seek professional debt advice and prioritize essential payments.
It’s also advisable to negotiate with creditors and suggest feasible payment arrangements based on your financial capability. Failing to settle business debts can result in personal liability for the debts, putting your personal income and assets in jeopardy.
Closing Accounts
Another vital step in the process is closing any outstanding business accounts. Here are some important things to consider:
Visit your bank branch or send a closure form to the bank to close your business bank account.
Empty the account to prevent government seizure of the balance.
Pay off any outstanding bills.
Check your credit report.
Adjust or cancel automatic bill payments.
Stop incoming payments.
Clear any negative balance.
Be aware that there may be financial penalties, legal ramifications, and early closure fees if the account is closed before the specified minimum duration.
You can cancel automatic payments with a formal request via email or on the company’s website.
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Dealing with VAT and PAYE Responsibilities
Addressing VAT and PAYE responsibilities is also a part of winding down self-employment. This includes cancelling VAT registration and closing PAYE schemes. The cancellation of VAT registration helps in avoiding potential penalties and continued VAT obligations even if the business is no longer operating. You can cancel your VAT registration either online or by completing form VAT7 and submitting it to HMRC.
In addition to VAT, other costs involved in the obligations include the potential need to make staff redundant and close the PAYE scheme, as well as notifying all pertinent parties about the business closure.
Cancelling VAT Registration
If you’re registered for VAT, you’ll need to cancel your VAT registration when you stop being self-employed. You can do this by completing form VAT7 and submitting it to HMRC either online or by post.
When you cancel your VAT registration, it’s necessary to provide a reason for the cancellation. The cancellation of your VAT registration is typically processed with effect from the 1st of January, two clear calendar years after you submit your cancellation, unless you specify a specific effective date of cancellation.
Closing PAYE Schemes
If you have employees, you’ll also need to close your PAYE scheme. To do this, follow these steps:
Submit a final payroll return.
Settle any outstanding tax and National Insurance payments to HMRC within 17 days.
Enter the cessation date in the ‘Date PAYE scheme ceased’ field in the ‘Employer – Employer Details’ section.
The specified timeframe for closing a PAYE scheme is within 17 days after the last payroll, or 14 days if paying by cheque, to settle any outstanding tax and National Insurance with HMRC. It’s important to ensure all tax and National Insurance obligations are settled within the specified deadline and to inform HMRC of the closure of your scheme.
Handling Employee Redundancies and Obligations
Upon deciding to cease self-employment, handling employee redundancies and legal obligations becomes essential. This involves:
Demonstrating that the employee’s role will no longer exist
Conducting a redundancy consultation
Issuing an ‘At risk of redundancy’ letter
Adhering to ACAS guidelines
Providing statutory redundancy payments
Addressing the business’ tax matters.
It’s also important to fulfill contractual obligations, such as notice periods, and ensure that all necessary processes, including redundancy procedures, are carried out in accordance with legal and ethical standards.
Staff Redundancies
Handling staff redundancies is a crucial part of the process of ending self-employment. As a self-employed business owner, you’re required to make statutory redundancy payments and engage with employees’ representatives if relevant. Redundancy pay is a form of compensation provided to employees who have been made redundant after completing a minimum of 2 years of service.
It’s important to ensure statutory redundancy payments are made, individually inform employees, and adhere to a fair redundancy process.
Legal Obligations
Fulfilling your remaining legal obligations to employees is another important step in the process of ending self-employment. These include providing statutory redundancy payments and addressing the business’ tax matters. It’s important to handle ongoing employee contracts with care and attention when transitioning from self-employment.
You’ll need to submit a final payroll return and settle any outstanding tax and National Insurance payments, including your final tax bill, to HMRC within 17 days. Failing to fulfill these obligations can lead to penalties.
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Insolvency Considerations
When contemplating the end of self-employment, insolvency is a crucial aspect to bear in mind. It’s important to understand the potential consequences of insolvency and explore options such as Individual Voluntary Agreements (IVAs). Insolvency can have substantial implications on an individual’s personal life, including the business closure, employee layoffs, and the trustee claiming business assets.
An Individual Voluntary Agreement (IVA) is a formal and legally binding arrangement between an individual and their creditors, facilitating the repayment of debts over a specified duration.
Implications of Insolvency
Understanding the implications of insolvency is an important part of the process of ending self-employment. Insolvency can have considerable implications on your personal life, including the risk of losing personal assets. There are a range of alternatives for self-employed individuals encountering insolvency, including Creditors’ Voluntary Liquidation, Individual Voluntary Arrangement (IVA), and a Debt Management Plan. An insolvency practitioner can help manage the affairs of the insolvent entity and ensure statutory requirements are met.
Insolvency can also have a detrimental impact on your credit rating.
Individual Voluntary Agreements (IVAs)
An Individual Voluntary Agreement (IVA) is a formal alternative to bankruptcy, allowing individuals to establish a legally-binding agreement with their creditors to repay debts. Establishing an IVA involves collaborating with an insolvency practitioner to formulate an agreement that may consist of a monthly installment plan over a specified period or a short-term arrangement involving a lump sum payment to creditors, based on your financial circumstances.
An IVA has a negative impact on your credit score as it is documented on your credit file for the entire duration of the IVA, usually lasting six years.
Post-Deregistration Responsibilities
Even after ending self-employment and completing deregistration, there are still certain post-deregistration obligations to be met. These include keeping business records and updating contact information. Following the deregistration from self-employment, it’s advisable to retain all business records for a minimum of 5 years after the 31 January submission deadline of the relevant tax year.
Updating contact information with HMRC and other relevant parties is essential to ensure that any future correspondence or communication related to your previous self-employment will be received by you, thus avoiding potential issues or missing important information.
Record Keeping
Keeping records is a critical part of your post-deregistration responsibilities. It’s a legal obligation to retain your business records for a minimum of 5 years after the 31 January submission deadline of the relevant tax year. You can be penalized for not maintaining necessary business records following the termination of self-employment.
It’s advisable to categorize your records based on their type and keep your ledger in an organized online folder for convenient access. Remember to retain all pertinent business records for a minimum of 12 months following deregistration to ensure availability of required documentation in case of HMRC inquiry.
Updating Contact Information
Updating your contact information with HMRC and other relevant parties is another important post-deregistration responsibility. You can notify HMRC of personal information changes, such as address, using their online form or by contacting them directly. In addition to HMRC, it’s important to notify the CIS helpline if you were registered and ceased trading as a contractor or subcontractor.
Promptly providing HMRC with a forwarding address ensures the continuous receipt of important correspondence. Failing to update contact information with HMRC following the cessation of self-employment can lead to penalties.
How Professional Services Can Assist in Deregistration
Ending self-employment doesn’t mean you have to navigate the entire process single-handedly. Professional services, such as accountants and tax advisors, can provide invaluable assistance during the deregistration process. Accountants can assist in the completion of required self-assessment forms and offer advice on the consequences and procedures of deregistration.
Tax advisors can provide assistance with VAT and PAYE obligations during deregistration by aiding in the calculation of VAT owed on stock and assets, as well as offering guidance on the deregistration process for VAT.
Accountants
Accountants can provide guidance and support during the deregistration process. They can assist in calculating trading income, totaling allowable expenses, and providing advice on closing costs. Accountants can also complete and submit your tax return, determine your tax liability, submit the return electronically, and communicate with you regarding payment amounts and deadlines. They play a pivotal role in overseeing business assets and liabilities during the cessation of self-employment.
Accountants can also aid in reclaiming VAT on business purchases post-deregistration and ensure accurate inclusion of VAT for reclaiming.
Tax Advisors
Tax advisors can help with the following:
Ensuring compliance with tax regulations
Identifying potential tax relief opportunities
Providing guidance on the process of deregistering from self-assessment tax
Ensuring accurate address information is provided to HMRC for the required duration after filing
Staying updated on tax regulations
Recommending tax-saving strategies
They can also provide guidance on the ‘sign-off’ process with HMRC, validate the legitimacy of any incurred losses, and explore strategies to minimize the tax liability prior to the deadline.
Conclusion
Deciding to stop being self-employed is a significant decision that comes with numerous considerations, from deciding when to stop and notifying HMRC to managing your business assets and liabilities, handling VAT and PAYE responsibilities, and dealing with employee redundancies and obligations. It’s important to understand the implications of insolvency, fulfill post-deregistration responsibilities, and seek professional assistance to ensure a smooth transition. Remember, ending self-employment isn’t the end of the journey—it’s a new beginning.
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FAQs
You can notify HMRC that you are no longer self-employed by writing to them or using the online form as soon as you stop being self-employed. HMRC may not be aware of this change if you now work as an employee or claim benefits.
To cancel yourself as self-employed, write to HMRC or use the online form to inform them that you have stopped being self-employed. HMRC needs to be notified of this change as soon as it happens.
An individual might cease being self-employed due to factors such as retirement, traditional employment opportunities, or financial challenges. Consider these factors when evaluating your own situation.
When stopping self-employment, insolvency can lead to business closure, employee layoffs, and the trustee claiming business assets, impacting personal and professional life.
An accountant plays a crucial role in managing business assets and liabilities when discontinuing self-employment, offering essential financial guidance to the company.
