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Self-Employed Tax & National Insurance Guide

Marin Perez
Portrait of smiling businesswoman sitting at desk in home office|self employed tax national insurance contributiions

It’s often clear if you’re self-employed but sometimes, it’s a bit murky. Knowing if you’re self-employed or not can have a big impact on your HMRC tax bill.

Why you need to know your employment status

There are three main reasons you should determine know if your worker status is self-employed or employed:

  • Your worker rights
  • The responsibilities of your employer
  • Your tax bill and National Insurance contributions (NICs)

How do I know if I'm self-employed?

Sometimes, it’s not clear If your work falls under the sole trader/self-employed category or not. This is especially true if you land work through an agency or through other individuals.You’re most likely self-employed if you:

  • The success or failure of the business is your responsibility
  • Have multiple customers at the same time
  • Have control over how, where and when you do work
  • Can hire others to help you finish projects or to do the work for you (this must be at your own expense)
  • Provide the equipment for your work
  • Charge a fixed price for your services
  • Sell services or goods with the goal of making a profit

Thankfully, this free HMRC tool will help you figure out your status. You’ll notice that you can also be self-employed as part of a business partnership or a limited company. For the rest of this article, we’ll focus on your tax bill and NICs when you’re self-employed as a sole trader.

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What to do if you're a sole trader

You should register with the HMRC when you become self-employed. At minimum, you must register for Self Assessment and National Insurance contributions.

Deadline to register is 5 October in your business’s second tax year. Remember, the tax year and calendar year don’t line up. So if you start your self-employed business in January 2019, you must register by 5 October 2019. January 2019 is part of the 2019/2020 tax year, so the October deadline is your business’ last day to register.The HMRC can fine you if you don’t register.

How much tax do you have to pay if self-employed?

How much tax you pay depends on what income tax band you fall under. Remember, you only pay taxes on the profits of your self-employed business. To calculate the profits, use your business gross income and subtract any tax relief for things like deductible business expenses.You’ll find the most current tax rates and tax bands below:[table id=48 /]

National Insurance contributions when you're self-employed

The National Insurance is a tax on income that is used to pay for a variety of government entitlement programs including the NHS, state pension and more.

The self-employed pay National Insurance contributions at different rates than employees of companies. Most self-employed workers who make a profit will pay the Class 2 and Class 4 National Insurance contributions.The main difference between the two is that Class 2 is a fixed rate while Class 4 is a percentage of profits.

What's the future of National Insurance contributions for self-employed?

The government planned to abolish Class 2 NICs on the self-employed while increasing the Class 4. This was expected to start in the 2018 tax year. Yet, the government has walked back this plan. It's too early to tell what, if any, tax increases the self-employed will face moving forward.

How to pay your taxes when self-employed

Here's a quick checklist on how to pay your taxes when you're self-employed:

  • Register as Self-employed by 5 October
  • Keep good records of your sales, takings, purchases and expenses
  • You’ll make two Payments on Account during the tax year to handle your tax bill
  • Your Payments on Account takes place 31 July & 31 January
  • On 31 January, you'll also settle any remaining tax from the previous year
  • Note: You don't have to make Payments on Account if your last Self Assessment tax bill was less than £1,000 or if you've already paid more than 80 per cent of the tax you owe

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