Financial Planning

How to navigate Tax & NI when you are self-employed

How to navigate Tax & NI when you are self-employed

When you are employed in the UK, most people do not need to worry about Income Tax and National Insurance too much. For self-employed people, however, things aren’t usually so simple.

 

For an employed person, assuming you are on the right tax code and have no work outside your employment, your employer should sort everything out through the PAYE scheme (Pay AS You Earn). For self-employed people, you will need to sort everything out yourself.

 

Identifying your status

 

The first step in all of this is to determine whether HMRC regards you as employed, self-employed or both.

 

This is usually not too difficult. For fulltime and part time employed people, for instance, you will likely be registered as employed. If you recently left employment, however, and started working for yourself then it’s important that you check HMRC has your correct employment status.

 

If you are at all unsure, you can check using HMRC’s online tool called the Employment Status Indicator. It should be able to tell you your status, based on your answers to the questions.

 

What to do when you become self-employed

 

Whether you were previously in employed work or not, if you start working for yourself then it’s vitally important that you notify HMRC.

 

To avoid being fined you must do this by the 5th October – the one after the conclusion of the tax year during which you became self-employed.

 

The Personal Allowance

 

Everyone in the UK is entitled to earn £11,850 tax-free in the 2018-2019 tax year. This applies regardless of whether you are employed or self-employed.

 

If you are both employed and self-employed, however, you only get one Personal Allowance. You do not get one for each type of employment. Your Allowance will be applied to what HMRC regards to be your main employment.

 

In this situation, it is important that you ensure HMRC is applying your Personal Allowance to your highest-paying job. You can check this by referencing the tax codes.

Your main job should have the code 1150L or 1185L. Other jobs you hold should be labelled as D1, D0 or BR.

 

Working out Income Tax as a self-employed person

 

When you are employed, you pay Income Tax on your total earnings. As a self-employed person, however, you first subtract your expenses from your total earnings. Whatever is left is the figure which is liable to Income Tax.

 

This effectively means you only pay Income Tax on your profits, not your total business revenues. Whatever your profits are, this is subject to the same 2018/2019 Income Tax brackets as employed people:

 

  • 0% Income Tax if your profits are under £11,850 (your Personal Allowance)
  • 20% if your profits lie somewhere between £11,851 to £46,350.
  • Anything between £46,351 to £150,000 is subject to 40% Income Tax.
  • All profits above £150,000 are subject to the 45% tax bracket.

 

So, as an example imagine you earn £75,000 in the 2018-2019 financial year.

 

The first £11,850 is not taxed. £34,499 will be taxed at 20%, and £28,649 will be taxed at 40%.

 

Your total Income Tax then, for the whole financial year would be £18,359.40 (i.e. £6,899.80 + £11,459.60).

 

Bear in mind, however, that if your business profits exceed £100,000, then you start to lose your Personal Allowance. For each £2 earned over this amount, you will have £1 taken of your Allowance.

 

Working out self-employed National Insurance contributions

 

You still need to pay National Insurance contributions when you are self-employed.

 

There are two types of NI which self-employed people are liable to pay. Currently in the 2018-2019 tax year, you will pay Class 2 contributions on profits over £6,205. You will pay Class 4 contributions on profits over £8,424.

 

The former works out at £2.95 per week, and the latter is 9% on profits between £8,424 and £46,350. Anything above that is liable to contribute 2% towards NI.

 

How to pay Income Tax & NI when you are self-employed

 

To pay the NI and Income Tax you are due, you must fill out a tax return for the previous tax year under Self Assessment. You must do this if your business profits exceeded £1000 during the financial year.

 

You can either do this online, or send it via post to HMRC. If you opt for the former route, you will need to fill out your Self Assessment by 31st January 2019, for the 2017-2018 tax year. If you opt for the latter, you must post your tax return by 31st October 2018.

 

If this is the first time you have filled in a Self Assessment tax return, then you can register on the .gov.uk website. They should then send you a Unique Taxpayer Reference (UTR) via post, which will show you how to set up your online Government Gateway account.

 

After you have set this up, you should be posted an activation code to finish the registration process. We recommend you do all of this well ahead of the deadline for your tax return, to ensure you avoid any problems with logging in when it comes time to submit it.

 

All self-employed people who need to fill in a tax return will need the following information in order to do so:

 

  • Your NI number.
  • Expenses records.
  • Your Unique Taxpayer Reference (UTR) number.
  • Any records which prove where you have already paid tax (e.g. P60).
  • Any contributions to pensions or charities. (These might qualify for tax relief).
  • Records showing income you have not been taxed on for the relevant financial year. For instance, interest on investments, dividends and self-employment income.

 

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