Self employment

What is self employment?

This is where you work for yourself without setting up a legal entity to trade through like a limited company or a limited liability partnership.

You might be familiar with construction industry workers who are self employed, like plumbers, plasterers and joiners. However there are many more industries that have plenty of self employed workers, especially with the uptick in the “gig economy”. Think of individuals you interact with in the economy like taxi drivers, hairdressers and medical professionals.

Most people who are self employed usually choose to do so in order to keep their administration time and costs low. The main requirement being a self assessment tax return having to be submitted to HMRC each year.

Due to most people having been employed at some point in their life, they understand a little bit about how they are taxed from reviewing their payslips. The same logic applies to being self employed, except your “gross pay” is the profit your business has made, or in other words, the number after you add up all the sales and subtract all the costs.

Even though this is self employment, you can still be able to employ people and become VAT registered if you choose to do so.

One thing you might want to consider is the level of exposure you have to your customers and clients. Due to you being self employed, then if anything goes wrong then the buck could potentially stop at you personally. Business insurance can help reduce this risk in many circumstances, and so it’s always a good idea to ensure you have adequate cover.

What is self assessment?

This is a system that HMRC uses to collect Income Tax and National Insurance for individuals that earn income from sources other than through employment, pensions, and savings.

For example, if you work for yourself, or have investments and receive dividends you will most likely need to register with HMRC to ensure you have the ability to report this income to HMRC each tax year.

A tax year covers 6^th of April to the following 5^th of April and so any earnings during that period that haven’t already been taxed will need to be reported by the 31^st of January following, together with payment of any Income Tax and National Insurance due.

When should I register with HMRC for self assessment?

You will need to register with HMRC as being Self Employed in order to be able to submit a Self Assessment if:

• You earn more than £1,000 in a tax year
• You need to prove you are self employed
• You want to make voluntary Class 2 National Insurance payments

This should be done by 5th October after the end of the tax year where you are required to file a tax return.

For example, if you need to file for the 2020/21 tax year, you should register by 5th October 2021 so HMRC have time to send you a tax return.

What is income tax?

This is a percentage you will pay on the profits of your self employment to contribute towards the exchequer to allow the Government to pay for things in the country like defence, transport, education and investments back into the economy via grants and business start up services.

In the UK there a various rates of income tax depending on where you live and how much profit you have made for a particular tax year. On the whole though, the rates listed below have been used for quite a few years and are applicable to the tax year 2020/21.

• 0% known as the personal allowance on profit between £0 and £12,500
• 20% known as the basic rate on profit between £12,501 and £50,000
• 40% known as the higher rate on profit between £50,001 and £150,000
• 45% known as the additional rate on profit over £150,000

Once you start making a profit of more than £100,000 each year, you will also start losing some of your personal allowance which might be a nice problem to have.

You will be able to find out the latest detail at gov.uk

What is national insurance?

This is a percentage you will pay on the profits of your self employment to contribute towards the exchequer to allow the Government to pay for things in the country like healthcare, state benefits and state pension.

In the UK there a various rates of national insurance depending on the profit you have made for a particular tax year. On the whole though, the rates listed below have been used for quite a few years and are applicable to the tax year 2020/21.

Class 2 national insurance

• £3.05 per week if your profits are over £6,475

Class 4 national insurance

• 0% on profit between £0 and £9,500
• 9% on profit between £9,501 and £50,000
• 2% of profit over £50,000

You will be able to find out the latest detail at gov.uk

What are payments on account for self assessment?

You will usually step into this situation if you owe more than £1,000 of tax in a tax year. HMRC don’t like the idea of people waiting until the following January after a tax year has ended for them to pay over their taxes if they owe more than £1,000.

HMRC’s method for getting their tax a little sooner is by requiring you to make 2 payments on account each year, each being 50% of the expected tax due on your next self assessment.

The dates for the payments are:

• 31st of January (before the tax year has ended, in other words, while you are still in the tax year)
• 31st of July (after the tax year has ended)

So, for example, if you were required to make payments on account and were expected to owe £1,500 of tax for the tax year 2020/21, then HMRC would most likely have asked you to pay 50% of this (£750) on 31/01/2021 and then will ask you to pay the other 50% (£750) on 31/07/2021.

This means HMRC have got their tax much quicker than if they were to wait until 31/01/2022 when taxpayers who owe less than £1,000 get to pay their tax bills.