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Self-Employed? Here's what you need to know about tax

James Watkins - Law on the Web

  1. 16 June 2015
  2. Business
  3. 0 comments
Freelancer taxes

For the average worker, tax isn’t a major issue that requires much thinking about. Obviously, no-one is thrilled about having to pay it, but if it is automatically extracted from your pay, you don’t need to think about it.

This is not the case for the self-employed. When you are self-employed, tax can become a morass of receipts, tax returns and various confusing calculations, particularly if you recently became self-employed for the first time.

Tax returns

If this is your first time paying taxes since becoming self-employed, you will need to register for self-assessment with HMRC – this must be done by October 5th of the tax year in which you became self-employed. The tax year runs from April 6th to April 5th.

You will then need to complete your annual tax return – the deadline for this is January 31st if you do it online, or October 31st if you do it on paper (using form SA100).

You will need to pay the tax you owe by the end of January 31st. Your tax will be calculated by HMRC when you send them your tax return.

However, this is all set to change soon, as annual tax returns will be replaced by a digital system which allows you to pay your taxes in “real-time”, over the course of a year. See our post on The End of Annual Tax Returns for more on this.

Record keeping

You will need to keep records of your income and outgoings – for example, receipts, invoices, bank statements, and anything else to back up the figures in your tax return.

HMRC may ask to see your records – if they are unsatisfied with your records, you may have to pay penalty charges. You should keep backup copies where you can to avoid this.

If you are self-employed, you must keep your records for at least five years from the January 31st submission deadline of the respective tax year – for example, if you submitted a tax return for the year 2014/2015, you will need to keep any records for that return until January 31st 2020.

What taxes do I need to pay?

Self-employed folks pay income tax and National Insurance, as employees and workers must. However, these both work slightly differently for the self-employed.

Based on your income and how you work, you may have to pay other taxes, such as business taxes or Capital Gains Tax.

Income tax

People who work for an employer pay income tax on their gross income (the amount that they are paid overall). If you are self-employed, you only pay income tax on your profits, meaning that you would deduct business expenses from what you earn before calculating the amount of tax you pay.

You can only deduct expenses for things that were actually used for your business – for example, travel expenses, marketing costs, or bills for office supplies and utilities.

If you use something for business and personal reasons, you can only claim the amount that you spend on business as a business expense. You can also claim a proportion of your household bills, such as your rent or mortgage, heating, and council tax, as a business expense if you work from home.

National Insurance

The self-employed pay two different types of National Insurance, Class 2 and Class 4, provided they earn above certain amounts in profit. Class 2 is paid at a flat rate, class 4 on a percentage of your profits.

Profits for the year Class 2 NI Class 4 NI
Less than £5,965 N/A N/A
Between £5,965 and £8,060 £2.80 N/A
Between £8,060 and £42,385 £2.80 9% on profits over £8,060
More than £42,385 £2.80 9% on profits between £8,060 & £42,385
2% on profits over £42,385

You can find more information on self-employed taxes and how to file them in our Taxes for the Self-Employed section. If you run your own business, you should look at our business tax section too.

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