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.
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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 2019, you would need to register with HMRC by 5 October 2020.
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?
Received a loan from your employer?
This could be seen as tax avoidance and subject to a loan charge. HMRC have asked people who have been part of disguised renumeration schemes to come forward and provide information.
Further support is available on a dedicated HMRC helpline on 0300 0534 226.
If you’re self-employed you’re entitled to the same tax free personal allowance as someone who is employed. For the 2020/21 tax year, the standard personal allowance is £12,500. Your personal allowance is how much you can earn before you start paying income tax.
If you earn over £100,000, the standard Personal Allowance of £12,500 is reduced by £1 for every £2 of income over £100,000 for the 2020/21 tax year.
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 usual to have 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 1250L for the 2020/21 and 2019/20 tax year. Your secondary job will have the tax code BR, D0 or D1.
Trading and Property Allowance
You can earn up to an extra £1,000 tax free from what is called the trading or property allowance.
If your income is less than £1,000, you don’t need to declare it. If your income is more than £1,000, you will need to register with HMRC and fill in a Self Assessment Tax Return.
However, it’s important to remember, if you claim this allowance, you cannot deduct business expenses.
In general, if your expenses are more than £1,000, you are better off not claiming the allowance and deducting your expenses on your Self Assessment Tax Return.
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.
2020/21 and 2019/20
|Personal allowance: 0%
||£0 to £12,500 you will pay zero income tax on your profits
|Basic rate: 20%
||£12,501-£50,000 you will pay 20% tax on your profits
|Higher rate: 40%
||£50,001-£150,000 you will pay 40% tax on your profits
|Additional rate: 45%
||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 2019/20 tax year you will pay:
- no tax on £12,500
- 20% tax on £37,500 (difference between £12,500 and £50,000)
- 40% tax on £10,000 (amount over £50,000)
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 £6,475 during the 2020/21 tax year, or £6,365 in the 2019/20 tax year.
If you’re over this limit you will pay £3 a week, or £156 a year for the 2019/20 tax year, and £3.05 a week, or £158.60 a year for the 2020/21 tax year.
If your profits are £8,632 or more in 2019/20 (£9,500 2020/21), you will also pay Class 4 NICs.
If you’re over this threshold, you will pay 9% on profits between £8,632 and £50,000 in the 2019/20 tax year (£9,500 and £50,000 2020/21), and 2% on anything above this.
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 2019/20 tax year you will need to submit your tax return by:
- 31 October 2020 for paper tax returns
- 31 January 2021 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 2021 for the 2019/20 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.