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Taxes for the Self-Employed

If you are self-employed, you must make sure that your tax affairs are in order.

Registering with HMRC

If you are just getting started as self-employed, you will need to register with HMRC to pay any tax – you can do this online on the HMRC website, or by calling 0300 200 3504. Failure to register or pay your taxes on time can result in penalty fines, which can be up to 100% of the tax that you owe.

You should register by October 5th, before you send your tax return. However, if you don’t register by this date, you can still avoid a fine if you pay your self-assessment bill on time.

Registration can take up to 20 working days after you apply, so make sure you do this in plenty of time.

Types of tax

When you work for an employer, your tax contributions are taken care of for you – when you are self-employed, you will need to take care of these calculations and payments yourself.

Depending on how much you earn, you may need to pay the following types of tax:

  • income tax
  • Class 2 National Insurance
  • Class 4 National Insurance

Depending on your earnings and what sort of business you are running, you may need to register for other taxes, such as VAT or Capital Gains Tax.

Income tax

Income tax is paid through a self-assessment. You can file this online through the HMRC website, or you can do it through the post, using form SA100.

If you file through the post, the deadline is October 31st – however, if you are filing online, you have until January 31st.

National Insurance

National Insurance (NI) works differently for the self-employed. Unlike normal employees, who pay Class 1 NI (deducted automatically from their pay), the self-employed must pay two different types of NI, both of which are slightly different in terms of when and how much must be paid.

Class 2 NI contributions

Class 2 contributions are paid at a fixed rate – that rate is £2.75 a week for the 2014/2015 tax year. If your net earnings are greater than £5,885 per annum, you will need to pay.

If your earnings are £5,885 or lower, you do not have to pay this. However, you will need to apply for a small earnings exception, which you can do by filling in form CF10, available on the government’s website.

Although the rate is weekly, you only need to pay once a year. HMRC will send you a payment request in April, along with a deadline by which you must pay.

There are a number of different ways you can pay your Class 2 contributions – you can pay at your bank, building society or local post office, you can pay by post, or you can pay by telephone or online banking.

HMRC’s bank details for paying by this method are as follows:

Sort code
08 32 20

Account number

Account name

Class 4 NI contributions

Class 4 contributions are calculated as a percentage of your annual profits. Like Class 2 contributions, you only pay them if your profits exceed a certain threshold – in this case, you are exempt from contributions unless your earnings are above £7,956.

Annual profit Class 4 NI contributions
£7,956.01 to £41,865 9% of profits between £7,956.01 and £41,865
More than £41,865 9% of profits between £7,956.01 and £41,865 plus 2% of profits over that amount

Profits up to £7,956 are not taxed at all for the purpose of Class 4 NI contributions, so you should subtract this amount from your profits when calculating – for example, if you had profits of £40,000, you would subtract £7,956 from £40,000, leaving you with £32,044. You would then calculate 9% of this amount, giving you a Class 4 NI bill of £2,883.96 for the year.

If your profits are above £41,865, you still pay 9% of the profits below this threshold, but you only pay 2% on everything about it. For example, if your profits were £70,000 for the year, you would need to work out the tax for the amount up to £41,865 (9% of £41,865 - £7,956 = £3,051.81) and add on the tax from above the threshold (2% of £70,000 - £41,865 = £562.70). This would leave you with Class 4 NI bill of £3,614.51.

For more information about the setting up your own business or working for yourself, read our guidance on the rules and regulations for the self-employed.

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