Tax for the self-employed

For self-employed people the obligation to report and paying the tax required is entirely on the person who is self-employed. Therefore, it is essential to know the obligations you have and when they will be due.

This article explains what you need to be expecting when you complete your self-assessment tax returns London and the tax regulations you need to adhere to.

What is self-employed tax?

Self-employed persons are liable for income tax on earnings they earn during an income tax year. They should also be aware of whether they are subject to an obligation to National Insurance that has also been incurred.

A person estimates their tax obligation for the year through self-assessment of their tax return for tax purposes to HM Revenue & Customs (HMRC). If you are required to, you must file a tax return each year to verify your income, the amount of taxes due and when tax you are due to pay.

As opposed to employees, self-employed persons don't have to pay taxes when they earn money however, they must budget and prepare for this. Knowing your status as an employee is crucial to verify your financial needs and obligation to report.

The employment status isn't an option, it's an issue of fact. To establish your employment status, you have to determine all the facts and conditions of your contract.

Certain factors that determine whether an individual is self-employed or employed are:

• Obligation to be mutual
• Paying the worker's wage (and not a third-party)
• Personal service
• Control Degree for integration into the organization
• Equipment provided by the owner
• The basis of payment
• Financial risk
• Potential to make money
• Business organization
• The length and quantity of engagements
• Contract's name as well as the position of the parties

It isn't the complete list however these are the top aspects to take into consideration when considering your job situation.

To aid, HMRC have created an online test called the Check Employment Status to Tax (CEST). Visit the HMRC CEST tool.

Knowing the status of your employment is essential to know what your obligations in terms of reporting. If you're self-employed, then you must make HMRC aware of this and sign up in accordance with the rules. Being aware early will give you the security of knowing you are aware of what's going to happen.

How do I calculate my self-employment tax?

In order to determine the tax burden To determine your tax liability, first you be required to calculate your taxable self-employment income for the year. This is calculated by subtracting allowable business expenses from your total income from trading.

Trading income refers to the business receipts you get during the time period in connection with your self-employment business. The business expenses you incur are allowable when you've spent money only and exclusively to support the trade you are engaged in.

In calculating the tax-deductible profit during the time period the individual can use two accounting strategies they can employ:

• Cash basis, also known as
• Basis

Both methods have advantages So think about your circumstances and the rules before deciding which to choose.

The cash basis is applied if a sole trader (or member of an association) has a turnover of less than £150,000. This method is designed to make it easier to calculate the taxation of small, unincorporated trades. Cash basis is the method used when you calculate the profit from trading by subtracting the amount you paid from income received in the tax year. The calculation is based on the date of the transaction.

The accruals basis takes into account the amount of income and expenditure based on the time when the company receives or pays them.

For HMRC instructions on how to calculate your self-employment earnings, click here.

It is important to remember that capital allowances could be a source of relief on certain capital expenditures that are incurred in the year. Therefore, relief is contingent on the accounting method applied.

After you've calculated your taxable profits for the year and then calculate your tax liability. From a tax standpoint, the non-savings tax rates will be applied to the profits you earn. Check out the table below to confirm the tax rates applicable or click the following hyperlinks for each England, Wales, Northern Ireland, and Scotland.

A person can earn as much as £12,570 without having to pay income tax which is known as a personal allowance. If your income exceeds £100,000, it could be a loss of any personal allowance. The amount may be reduced if you qualify for the blind or married persons allowance.

The tax rate applicable will differ based on whether you're classified as a Scottish taxpayer. It is necessary to conduct an assessment every year to ensure that you are using the appropriate rates for income tax.

How much is UK Tax rate applicable to self-employed?

Self-employed people are taxed on their earnings during the tax year.

After you calculate your taxable profit, you are required to pay tax on income at the current rates for non-savings. The following rates will be in effect from 6th April 2023, be in effect:

For England, Wales and Northern Ireland:

For Scotland:

Personal tax exemption as well as the greater rate thresholds will be frozen to the 2027/28 tax year.

To pay National Insurance, Class 2 and 4 NICs have to be taken into consideration along with income tax. Below is an overview of the tax rates for the tax year currently in effect (2023/24):

To view the previous year's NICs rates, visit for the rates of previous years on HMRC site here. Additional information on how the Class 2 and 4 NICs that are payable is available in the article below.

What is the best way to be self-employed and pay tax?

Self-employed people pay their tax bill for the year by self-assessment. The liability is calculated during the year when you file your self-assessment tax returns.

For you to submit your tax refund, you have to first sign up for self-assessment as well as NICs through the HMRC website. Registration will grant you the Unique Taxpayer Reference (UTR) from HMRC and you will need to provide your tax information in a timely manner.

Apply for self-assessment prior to 5th October following your company's first tax year. For instance, if you established your business during the tax year which ended on 5th April 2023, then you must register for self-assessment before the 5th of October 2023.

HMRC claims it will take twenty working days for this to be issued number, therefore tax return filers who are first-time must keep this in mind. Once you've received the UTR Number, you will be able to submit taxes to HMRC at the time you want to.

The method you choose to submit can alter the submission due date. If you're submitting making your tax return in paper and have the required additional pages, you must submit it to HMRC by midnight on October 31st. This deadline is for the tax year which has been completed.

The deadline to submit tax returns online is midnight on the 31st of January, following the close for the fiscal year. This is the case for taxpayers who use your Government Gateway account or commercial software.

The tax forms you send to HMRC will be dependent on your specific situation. It is essential to study HMRC instructions when you are creating your self-assessment tax returns to ensure that you've provided accurate details. If you require help with this we'll be pleased to fill out the form for you.

Partnerships that are run by individuals have to submit an additional registration for the tax return of the partnership to HMRC. It is also required to personally register to self-assess.

What's the deal with Self-employment Income Support Scheme?

To help self-employed people (including partners) who are affected by COVID-19 the government introduced an initiative called the Self Employment Income Support Scheme (SEISS). The scheme was available to individuals beginning on 13th May 2020 and ending 30th September 2021. 5 grants were granted.

If you were awarded an SEISS grant, you should have included it in an income tax self assessment return. The reason is that the grant's income was tax deductible.

If you've received an incorrect COVID19 payment and you have not received a tax return for self-assessment, it must be filed to HMRC in order to reimburse the amount. HMRC guidelines is available here..

Which National Insurance do I pay If I'm self-employed?

Every year, self-employed people need to take a look at the National Insurance position and make sure that they are paying the right obligation. There are two kinds of National insurance contributions that self-employed people should be aware of: Class 2 and Class 4.

Rates for the Class 2 and 4 classes are less than those classified as employed and are subject to the national insurance class 1.

Class 2 National Insurance Beginning in the tax year 2023/24 the Class 2 rate has been fixed at £3.45 every week you are self-employed. In Class 2, NICs are payable by self-assessment and thus calculated when you file taxes. If a liability does occur, it will be due before the 31st of January following the conclusion of the tax year. For instance, in the tax year 2023/24, year, the due date for payment is 31st January 2025.

Beginning in the tax year 2022/23 the Class 2 NICs are going to be due under self-assessment if your tax-adjusted profits exceed the lower income threshold for the tax year.

When your tax-adjusted earnings are lower than the threshold for lower profits, however, they are higher than the small profit threshold The paying Class 2 NICs is not required, however, you will be treated as if you paid it.

There is no requirement to pay Class 2 NICs if the profit after tax is below the small profits threshold. But, you can choose to make the NICs on your own to establish a qualifying year the purpose of NIC.

4 National Insurance : The liability you have to pay for class 4 National Insurance will depend on the profit you earn and how they compare relative to the lower profit limit and the higher limit for profits. Below are the rates applicable to the tax year you need.

A person is liable under Class 4 NICs when the profits generated during the period is greater than the lower limit of profits. Profits that are higher than this amount are the subject of class 4 NICs at 9.9%. If your profits surpass the maximum profit limit and exceeds the upper limit, it is the subject of NIC at 2percent.

This is the class 4 NIC rates apply:

Here are a few example exercises to show the ways in which the Class 2, 4 and NICs function:

1. In the tax year 2023/24 you expect to make an taxable profit of around £62,000. Your trading started on the 8th July 2023 till the close in the year tax. you want to know the extent of your obligation for NICs Class 2 and 4.

Class 2 responsibility: £134.55

(39 weeks x 3.45 = 134.55)

Class 4 responsibility: £3,627.49

(50,270 - 12,571 = 37,699 x 9% = 3,392.91)

(62,000 - 50,271 = 11,729 x 2% = 234.58)

2. In the tax year 2023/24 the tax year 2023/24, you earn a taxable profit of P10,500. Which is the NIC tax liability in the current year?
3. Class of responsibility PSnil

If the profits are lower than the lower threshold of profits there is no obligation to pay. You will be able to claim the qualifying NIC year, without having to pay the liability.

Class 4 Liability of NIC: PSnil

The year won't be a source of any liability due to the lower profit limit of £12,570 was not overridden.

What can Account Ease Accountants aid me?

Find expert assistance with expert advice Account Ease Accountants to help you plan your tax and reporting requirements of self-employed people.tax

We can help in self-assessment tax returns and bookkeeping tax planning, VAT returns and any other independent financial services.

To learn more or schedule a free consultation, please call 0208 33 4599 or fill out our online inquiry form.