Most types of profits are charged with taxes, including grants, benefits, pensions, savings interest, and many other kinds of revenue-generating sources. In this article, you will learn what it really means to be self-employed, how to become legally self-employed, the tax that self employed people pay, brief aspects of tax bill relief, and all the other things you need to know. Being your own boss has its freedom but always with one legal commitment, which is to pay tax on self-employed income.
What Is the Tax on Self-Employed Income?
Self employed people pay tax to HMRC, specifically income tax and national insurance contributions/NICs (class 2 national insurance and class 4 national insurance). Generally, you may also make VAT (Value Added Tax) payment in case your total income exceeds the tax-free threshold.
To determine if you are going to pay income tax, you will need to clarify the differences between being employed and self-employed. Identifying which of the two you belong to may sound like a simple task, but overlaps may happen anytime. You may experience being listed as someone employed in one area whilst being under self employment in another.
It is possible to be both—employed and self-employed—since you can always work, for example, in a particular profession in a day, and then get to working for yourself right after, as in the evenings. What is important is that once you recognise you are already working for yourself, you should report to HMRC (HM Revenue and Customs) right away so you can register legally for self employment.
Employees’ earnings, on the other hand, must go through the PAYE (Pay As You Earn) system, meaning they will not need to pay tax bill separately as their tax payments will go through this system. This is one huge distinction between employees and self employed people.
Using the Status Indicator for Your Employment Status
There is a tool you can use to determine your status of employment, called CEST, which stands for Check Employment Status for Tax. Whether you are an employee, agency, or hirer, you can use this software tool from the government website to determine your status or others’ (e.g., your workers), without fees at all. Whether you answer for yourself or workers, make sure you come prepared with the details that will be asked for in the CEST form.
The questions section in the CEST tool include the following: the role or liability in the job, who has the power to decide on what task is to be accomplished as well as where, how, and when they are to be fulfilled, how you or they obtain the payment, and if the contract comprises of a certain amount of money for the business expenses and other corporate benefits.
The more accurate your answers, the more reliable the result would be. As much as possible, get your contract ready or that of your workers in case you are determining statuses on their behalf.
In addition to this status indicator guide, you can also consult tax professionals to determine employment statuses. Legend Financial can provide much support for the next steps to take.
What Is Considered Self-Employed?
What does it really mean to work for yourself? Basically, you are the boss of your own business, company, or trade, so you do not go with the usual workers’ rights and obligations.
Self-employed status comes in various names—independent workers, gig workers—and of distinct types. But generally, when you work for yourself, you are in the self employment section in the UK, classed as a sole trader.
Under self employment, you may check yourself on these boxes:
- You take full charge of the business or the partnership, both when it fails or succeeds.
- You implement your time, place, and method to accomplish the task and answer yourself or the business partnership in terms of deadline.
- You service numerous customers simultaneously and so, must hire for extra workforce to help you do your part.
- You are the one who bills a certain amount for your product or service.
- You are making profits with your goods, whether tangible or intangible.
What Are the Tax Rates Imposed on the Self-Employed?
Income tax and national insurance contributions (class 2 and class 4 national insurance) are the major tax payments that self employed people are obliged with, no corporation tax bills. They will only register for and pay tax on VAT once their annual turnover exceeds the 2023 24 threshold.
Income Tax
Self employed people pay income tax on the earnings from their trade or savings interest, not their overall profit. In fact, you can get a rough estimate of your income tax bill just by subtracting your business expenses from your trading incomes. But the income tax payments against your profits under self employment are like those that are employed.
Income tax rates depend on which income tax bands your earnings belong to. Income tax rates, bands, and thresholds are the same throughout the UK, except Scotland. For the 2023 24 tax year, the small profits threshold is up to £12,570. Any excess income from this threshold will be taxable at certain costs depending on their income tax bands, from £12,570 and 50,270 and above.
The table illustration below shows each of the bands’ rates for the tax year 2023 24:
| Tax Bands | Taxable Income | Tax Rate |
|---|---|---|
|
Basic Rate |
Between £12,570 and 50,270 |
20% |
|
Higher Rate |
Between £50,271 and £150,000 |
40% |
|
Additional Rate |
More than £150,000 |
45% |
To get a comprehensive discussion about the income tax rates imposed on the self-employed, read our article regarding self employment tax rates. You may also opt to reach our top tax professionals at Legend Financial since certain unique tax situations may make it a little bit complex for you to make tax calculation on your income tax payment.
You may also find that you are eligible for many other traders’ income tax allowances or operation expenses allowances (business insurance, stationery, video and marketing campaigns, and other expenses wholly and exclusively dedicated for the business) that could serve as your self employment tax relief.
National Insurance Contributions/NICs
Self-employed individuals are also required to pay tax on their National Insurance, specifically class 2 and class 4 national insurance contributions. How much tax you pay for class 2 and class 4 national insurance contributions will depend on your total income. Class 4 national insurance contributions will be worked out through income calculator during the self assessment filing process.
National Insurance contributions threshold for both class 2 national insurance and class 4 national insurance contributions this tax year is £6,725. If the total money you generate does not exceed this limit, you do not need to make class 2 and class 4 national insurance payments.
However, many make voluntary payments as they can take advantage of universal credit and other benefits. If not NICs, they can also apply for pension contributions.
The illustration below shows how much tax class 2 and class 4 costs:
| Type of Tax | NIC Class | Taxable Income | Tax Rate |
|---|---|---|---|
|
Small Profits |
Class 2 |
£6,725 to £9,880 |
£3.15 per week |
|
Lower Profits |
Class 4 |
£9,881 to £50,270 |
10.5% |
|
Upper Profits |
Class 4 |
£50,271 and more |
3.25% |
Class 2 national insurance contributions apply to small profits between £6,725 and £9,880. The HMRC calculator gives Class 2 contributions fixed costs of £3.15 weekly. Class 4 insurance contributions, on the other hand, apply to you if your total earnings belong to the lower and upper profits threshold.
VAT
Aside from income tax and national insurance contributions, you may also deal with VAT business expenses when your annual profits go beyond £85,000. The standard costs for VAT are 20 per cent. However, as the VAT reverse charge has been implemented, some products or services are taxed at a reduced or zero rate. Home fuel, for instance, costs 15 per cent in VAT, whilst children’s clothes are zero rated.
How Can You Register as Self-Employed?
Once you start working for yourself, you need to pay the income tax you owe via self assessment tax return. The first step is to register with HMRC that you are self-employed. The registration process for sole traders can be straightforward, but since this is a crucial level toward legalising your business, it’s best that you seek tax professionals’ support so you will not skip on anything.
Generally, take note of this process for the registration:
- Figure your status of employment
- Register for Self-Assessment
- Get your email with the UTR file and instructions
Submit your income tax returns - Pay your income tax, national insurance, and possibly VAT
Having determined your status of employment, the process is streamlined all the way from there. You have the option to apply via online software or through paper forms, but even so, HMRC expects that you are registered for Self-Assessment by applying online.
You sign up online through your business’ tax accounts. But if you have no log-in credentials yet, tax professionals at Legend Financial can create one for you and work through this process on your behalf.
Simply ensure that you prepare the documents required during the registration, which include the specific date of your business’ incorporation, information about your work and finances, and all the other pertinent, basic information such as your home address and National Insurance figure.
Once the registration forms are completed for Self-Assessment, HM Revenue & Customs allocates a Unique Tax Reference to your records and this is then received in the post. It then follows on the next part after being registered and further guidance notes are accompanied by it.
The UTR is normally issued within 10 to 14 working days, but some factors might delay this timeline and you may even need to recontact HM Revenue & Customs for a follow-up.
Alongside the UTR number, the letter or email also records a content of instructions and reminders for you to finish filling out your self-assessment tax return so that you avoid submission beyond the HMRC’s deadline, which can put you at risk to penalty and other legal problems. To submit on time, finish the self-assessment tax return right after you receive the email.
At the end of each tax year, there is a set deadline for you to finally straighten up your status of employment record, especially when the status check shows that you are under self employment. Regardless of the date you begin working as self-employed, by the 5th of October next year (indicating the end of the tax year), it is your liability to be legally registered as one.
This means that by the second year of your business, company, or trade, you should already be registered legally as self-employed and filing self assessment tax return. See to it that you are complying with the submission deadline for self assessment tax returns to avoid facing surprisingly hefty self employment tax bill and penalty fees, which can easily befall upon your business if something ever goes wrong.
Enlisting for VAT schemes is conditional. This is so when you already generate profit that reaches beyond £85,000. In some instances, you may decide to sign up for it when it is convenient for your business, particularly when it’s involved with other traders that are VAT-registered. You may qualify for claiming back VAT when you trade with these businesses.
What Happens When You Lose Your UTR File?
Having prepared the requirements, the next filing of self employment tax return would be easier. However, some taxpayers may misplace their UTR numbers. If you are in the same circumstance, you can simply look back at the details of your tax return, which includes a section of your payments, payslip, notices, and tax accounts.
If you are unable to find your UTR figure and do not have any copies of the documents mentioned above, you can always turn to the Self-Employed helpline to find your file.
For Those Who Skipped on Filing Self Assessment Tax Return Online
If you did not sign up on online software the first time, create a tax account for your business. Make sure the account states you are a business instead of as an individual. Use your previous credentials to log in to your existing account. Prepare your UTR number, which you should be doing from now on every time you file. When you file a paper tax return, your UTR figure may have been given to you on paper before.
Aside from online software or paper form, you can register as self-employed in the UK posting it to HMRC. Tax professionals at Legend Financial provide the most fitting solution for your situation and guide you throughout completion.
How Much Is Tax-Free for Self Employed People?
The same UK tax rule for employees applies to self employed people. If you are under self employment, the threshold or tax-free amount for the 2022 23 tax year and onwards is £12,570. As long as your overall profits stay within the yearly tax-free personal allowance, you will not get self assessment tax bill on income tax for that fiscal year.
But when you have both the statuses, employment and self employment, the calculation process of your personal allowance could get complex. Any of the jobs you have that gives you much bigger profits would weigh more than those you get lesser earnings. So normally, the standard personal allowance would apply to the work that generates much income.
For class 2 and 4 tax and national insurance contributions, the 2023 24 tax year threshold is £6,725. VAT registration and payments, on the other hand, are not required if your annual turnover is below £85,000.
Allowances and Income Tax Reliefs You May Be Eligible For
There are two types of allowances you might be eligible to claim—trading income allowance or property allowance—depending on how much you earn.
You may be eligible for income allowance (or trading allowance) if your small business’s total income is £1,000 for the tax year or less than that amount. This also applies to any miscellaneous or casual profits that amount to less than £1,000 or of that amount, and not just for the earnings from your products or services.
On the other hand, you can claim a property allowance when you generate profits from your property, for example, making profits from garage or driveway rentals. For more information about the tax reliefs and allowances you may qualify for, take a look at our blog regarding tax relief.
Don’t miss out on your chance to reduce as much tax as possible from your obligations. Tax professionals at Legend Financial can help you maximise much of your allowances and claim your reliefs depending on how much income you make.
How Can You Pay for Self-Employed Income Tax?
Once you’re registered under self employment, you need to pay the tax you owe according to your earnings and file self assessment tax return every year (alongside your National Insurance contributions/NICs or VAT).
With HMRC tax investigations going on annually, make sure you don’t miss out on your tax payment and other obligations. Let tax professionals at Legend Financial guide you all throughout the 2022 23 tax year, 2023 24, and onwards, from registration to paying your tax on self-employed income. For further enquiries about how we can help, reach us today.
References
Working for yourself. (n.d.). Retrieved from gov.uk: https://www.gov.uk/working-for-yourself
Check employment status for tax. (n.d.). Retrieved from gov.uk: https://www.gov.uk/guidance/check-employment-status-for-tax
What is the trading allowance? (n.d.). Retrieved from gov.uk: https://www.litrg.org.uk/tax-guides/self-employment/what-trading-allowance
Find a lost UTR number. (n.d.). Retrieved from gov.uk: https://www.gov.uk/find-utr-number
Set up as a sole trader. (n.d.). Retrieved from gov.uk: https://www.gov.uk/set-up-sole-trader
One Response
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