Tax and National Insurance when you're self-employed
When you’re self-employed, you are responsible for paying tax and National Insurance on your income. It’s important to stay on top of all your records in order to calculate and work out how much you need to pay.
- Work out your employment status
- Register with HMRC as self-employed
- Check whether you need to register for VAT
- Keep good records
- Fill in a tax return every year and pay your tax on time
Work out your employment status
HMRC’s Employment Status Indicator will tell you whether you’re self-employed, or employed. Scroll down for information on using it.
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. It’s completely anonymous and won’t ask for your name or any other personal details.
Using the Employment Status Indicator
There are two pages to read before you get to the tool.
- On the first page, read the information and click “Access the ESI tool and further guidance”.
- On the second page, read the ‘Conditions of use’ section and if you agree, click “I accept the conditions of use – go to the ESI tool”.
- Answer the questions.
The tool uses some technical language, so when you answer the questions remember:
- You are ‘the worker’
- The person or company you work for is ‘the engager’
Register with HMRC as self-employed
To make sure you don’t miss any payments, it’s best to pay your National Insurance contributions by Direct Debit.
As soon as you become self-employed you must tell HMRC.
The very latest you can register with HMRC is by 5 October after the end of the tax year for which you need to file a tax return. The tax year runs from 6 April one year to 5 April the next. If you register too late you may be liable to penalties.
How much tax and National Insurance do I pay as self-employed?
If you’re self-employed, you probably need to pay Class 2 (and maybe Class 4) National Insurance contributions as well as Income Tax.
These contributions pay for benefits such as the basic State Pension, Maternity Allowance and Bereavement Benefit – if you don’t keep your contributions up to date, or your payments are late, it could make it more difficult to claim these benefits.
In the March 2016 Budget, the Chancellor announced that Class 2 NICs will be abolished from April 2018. The government is currently looking at proposals to change Class 4 NICs to include benefit contributions. Final details are yet to be agreed.
Check whether you need to register for VAT
Some self-employed people also need to register for VAT. Others may benefit from registering voluntarily.
Keep good records
To work your tax out correctly you’ll need good records of the money that comes into and goes out of your business. It will be much easier to fill in your tax return if you keep good records as you go along rather than trying to find all your invoices and receipts at the end of the year. You can be fined for failing to keep records.
Your basic records must include:
- All your sales and takings
- All your purchases and expenses
To work these out you should keep any paperwork or electronic documents relevant to your business, including:
- Mileage records
- Bank statements
- Receipts for purchases
- Your P60s if you are also employed
Fill in a tax return every year and pay your tax on time
In April each year, HMRC will send you a letter telling you to complete a tax return online, or a paper tax return to fill in, for the tax year that has just ended.
There are different deadlines for completing your tax return and paying the tax you owe.
Tax return deadlines
- Online tax return: 31 January after the end of the tax year.
- Paper tax return: 31 October after the end of the tax year .
The tax year begins on 6 April and ends on the following 5 April.
- 31 January is the payment deadline for the balance of what you owe for the previous tax year. Normally you will already have made two payments on account for that year. This is also the deadline for making your first payment on account for the current tax year.
- 31 July is the deadline for your second payment on account for the current tax year. The nature of Self Assessment means that it can be several months before your tax is due. It’s good practice to make provision for any tax owed on an ongoing basis.