If you’re going self-employed you’re effectively setting up a new business and starting on a new adventure. Once you have decided what you’re going to do, you’ll need to decide on what the structure of your business is going to be, whether you’re a sole trader or a limited company. Crucially too, you also need to be aware of what taxes you need to pay when going self-employed. This article will help you understand what taxes and national insurance you need to pay when starting your self-employed journey. The downside of doing things incorrectly is a self-assessment investigation which no one wants!
You may also wish to consider setting up as a Limited Company. There are certain things you will need to do, including registering your company with Companies house and putting together a memorandum of association. You will also need to pay Corporation Tax
There are three types of taxes that you’ll need to consider:
You also need to consider the tax-free personal allowance, essentially how much you can earn before you start paying tax.
You’re allowed to earn a certain amount tax-free each tax year. The tax year in the UK runs from 6 April to 5 April every year.
The personal allowance for 2018/2019 was £11,850 which increased to £12,500 for tax year 2019/2020. This is the same for employed and self-employed people.
Your personal allowance is restricted once you earn more than £100,000. Once you hit this amount, your personal allowance works on £1 for every £2 you earn. If you earn over £122,000 you are not eligible for any personal allowance.
You will only get one personal allowance which HMRC will usually apply to the job which pays you the most. Your main job should have the tax code 1250L or 1185L. Your secondary job will have the tax code BR, D0 or D1.
You pay tax based on your business profits. This is dependant on how much income you have generated, offset against the ‘allowable expenses’ you’ve incurred to run your business. Business costs should also be deducted from your income so you can calculate your profit.
For 2019/2020 you can make up to £12,500 tax-free (2018/2019 – £11,850). For earnings up to £50,000 you will pay the basic tax rate of income tax of 20% (compared to £46,350 for 208/2019). The higher tax rate of 40% is triggered once you earn £50,000. The highest bracket is earnings over £150,000 where you will pay the highest tax rate of 45%.
It’s important to note the rate is only applied to the profit between the brackets, and not the whole amount. So assuming your profit is £75,000 in the tax year 2019/2020 your tax will be as follows:
Total = £17,499.60
If you earn less than £1,000 the Tax-Free Trading Allowance on Property and Trading Income applies. This means you can get up to £1,000 per year tax-free.
Class 2 National Insurance Contributions
Most self-employed people pay Class 2 NICs if your profits are at least £6,365 during the 2019/2020 tax year (£6,205 for 2018/2019). If you’re over the limit you will pay £3 a week, or £156 a year for the 2019/2020 tax year (£2.95 a week or £153.40 a year for tax year 2018/2019).
Class 4 National Insurance Contributions
If your profits are over £8,632 or more in 2019/2020 you will also pay Class 4 NICs. You will pay 9% on profits between £8,632 and £50,000, and 2% on anything above this (for tax year the range is £8,424 to £46,350)
Example – If you make a profit of £75,000 you will pay (based on 2019/2020 tax year):
Class 2 NICs
Class 4 NICs
Total payable = £3,983.10
You will have to submit a Self-Assessment tax return for the previous year.
Self-employed allowable expenses
Your business will have ongoing running costs you can deduct to calculate your taxable profit. These include: –
Other Self-Employed Benefits
So in summary, becoming self-employed is an exciting journey to venture on. The very nature of being self-employed means you do need to take ownership of all of your affairs, including how you pat tax and national insurance. If you do need any Tax Advice, don’t hesitate to call us on 0800 471 4546.