When you’re self-employed, you’re responsible for paying tax and National Insurance on your income. It’s important to stay on top of all your records in order to work out how much you need to pay.
Working out your employment status
To work out how much tax and National Insurance you should pay, first you need to work out whether you’re employed or self-employed.
This is usually straightforward, but sometimes it’s a bit more complex – for example you could be employed in one job and at the same time self-employed in a different job.
The HM Revenue & Customs (HMRC) website has a tool called the Employment Status Indicator that will work out your employment status for you based on your answers to a series of questions.
This is only an indicator and will not give you a definitive answer on your employment status.
Registering as self-employed
As soon as you become self-employed you should tell HMRC.
The very latest you can register with HMRC is by 5 October after the end of the tax year during which you became self-employed.
For example, if you started your business in June 2017, you would need to register with HMRC by 5 October 2018.
The tax year runs from 6 April one year to 5 April the next. If you register too late you might be liable to pay penalties.
How much can you earn tax free if you’re self-employed?
If you’re self-employed you’re entitled to the same tax free personal allowance as someone who is employed. For the 2018/19 tax year, the standard personal allowance is £11,850.
For the 2019/20 tax year, the standard personal allowance will be £12,500.
If you’re already self-employed and will need to submit a Self Assessment tax return for the 2017/18 tax year, your personal allowance is £11,500.
If you earn over £100,000, the standard Personal Allowance of £11,850 is reduced by £1 for every £2 of income over £100,000.
However, if you have two jobs and one is self-employed, things are a little more complicated.
You only get one personal allowance, which is usually applied to what HMRC see as your main employment.
It is important you make sure your personal allowance is applied to the job paying you the most.
The easiest way to find this out is to look at the tax code. Your main job should have the tax code 1185L for the 2018/19 tax year, or 1150L for 2017/18. Your secondary job will have the tax code BR, D0 or D1.
Income tax when self-employed
When you’re self-employed, you pay income tax on your profits, not your total income.
To work out your profits simply deduct your business expenses from your total income. This is the amount you will pay income tax on.
The amount of income tax you pay on your profits is the same as if you were employed.
|Personal allowance: 0%
||£0 to £12,500
||£0 to £11,850 you will pay zero income tax on your profits
||£0 to £11,500 you will pay zero income tax on your profits
|Basic rate: 20%
||£11,851 to £46,350 you will pay 20% tax on your profits
||£11,501 to £45,000 you will pay 20% tax on your profits
|Higher rate: 40%
||£46,351 to £150,000 you will pay 40% tax on your profits
||£45,001 to £150,000 you will pay 40% tax on our profits
|Additional rate: 45%
||Over £150,000 you will pay 45% tax on your profits
||Over £150,000 you will pay 45% tax on your profits
Remember, the rate is only applied to the profit between the brackets, not your whole profit. So, assuming you take the full standard personal allowance, if your profit is £50,000 in the 2018/19 tax year you will pay:
- no tax on £11,850
- 20% tax on £34,499 (difference between £11,851 and £46,350)
- 40% tax on £3,649 (amount over £46,350)
National Insurance Contributions if you’re self-employed
National Insurance Contributions (NICs) are contributions which pay for certain benefits including the State Pension and Universal Credit.
Certain benefits are also based on the contributions you have made.
Do self-employed workers pay National Insurance?
Yes, most self-employed people pay Class 2 NICs if your profits are at least £6,205 during the 2018/19 tax year, or £6,025 in the 2017/18 tax year. If you’re over this limit you will pay £2.95 a week, or £153.40 a year.
If your profits are £8,424 or more in 2018/19, or £8,164 in the 2017/18 tax year, you will also pay Class 4 NICs.
If you’re over this threshold, you will pay 9% on profits between £8,424 and £46,350 in the 2018/19 tax year, and 2% on anything above this. For the 2017/18 tax year, it’s 9% on anything between £8,164 and £45,000 and 2% on anything above this.
There are plans to abolish Class 2 NICs, but the government has delayed these until April 2019.
How to pay tax and National Insurance when self-employed
Each year you will probably have to submit a Self Assessment tax return for the previous tax year.
For the 2017/18 tax year you will need to submit your tax return by:
- 31 October 2018 for paper tax returns
- 31 January 2019 for online tax returns
You will, among other things, need to declare your total income and expenses. Once you’ve completed and submitted the return you will be told how much tax and National Insurance you owe. This must be paid by 31 January 2019 for the 2017/18 tax year.
If you’re running a private limited company (Ltd) or limited liability partnership (LLP) you will also need to pay corporation tax on your business profits.
You might also have to submit a Self Assessment tax return for any money you earn through the company.
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