Guide to UK Self Employed Tax for Beginners

Self-employment has lots of attractions. First off, by going self-employed, you are in charge of decision making. Basically, you’ve the freedom to explore several creative solutions. Second, you’ll be able to set your own hours. This often leads to improved quality of life. Lastly, you get to reap the rewards of your hard work.

In the UK, there are 5 million self-employed people who account for 15% of the labour market. While self-employment is exciting, there is one off-putting thing – self-employed tax. When you’re self-employed, you need to pay tax on your income. Failure to do so can lead to penalties.

Most people who turn to self-employment are not aware of what taxes to pay. Want to learn more about self-employed tax and how to file returns? in this guide, we take you through the UK self-employed tax.

What Is Self-Employed Tax?

Self-employed tax is a form of income tax that self-employed people pay on their profits. They pay tax on profits after deduction of business expenses from total income.

The amount you pay as self-employed tax on your profits is similar as if you’re employed. For example, each tax year runs from 6th April to 5th April. This means the 2019-20 tax year covers profits made during the same account year which lasted between 6th April 2019 to 5th April 2020.

The profits you declared during this tax period are eligible for self-employed tax. The HRMC usually collects income tax from employees directly through the PAYE system. But for self-employed persons, they need to work out their business expenses, and income then pay the tax each January.

For sole traders, they’re required to declare their earnings and allowable expenses as part of their self-employed tax. This is because these businesses are not separate large entities.

If you’re self-employed and run a limited company or limited liability partnership), HRMC will tax you through a company tax return. But you’re still required to send a personal tax return that includes dividends and salary received through the company.

How Much Self-Employed Tax Should I Pay?

As earlier said, self-employed persons pay self-employed tax on profits. The tax rate usually applies to earnings between the brackets and not the whole profit. Let’s assume you take a personal allowance. For the 2019-20 tax year, the personal allowance was £12,500. This amount will remain the same for the 2020-21 tax year.

The basic tax rate is 20%. This applies to income within the basic rate threshold. If you take the personal allowance for the 2019-20 tax year, this was £12,501 to £50,000. The higher rate is 40%, and this applies to earnings between £50,000 to £150,000.

You earned £70,000 in profit for the 2019-20 tax year. You’ll pay…

No tax up to £12,500
20% between £12,501 to £50,000
40% between £50,001 to £150,000

What you need to know is that self-employed persons can offset certain expenditure against the self-employed tax. This means people can reduce their taxable income by deducting specific expenses from it. According to the HMRC, the following are allowable expenses for the self-employed.

Mobile, phone and internet bills
Printing
Stationery
Rent
Utility bills
Property insurance
Vehicle insurance
Breakdown cover
Stock and materials
Legal costs

The basis period is when the HMRC assesses your tax. This is the same as your accounting period, especially if your accounting year ends on a similar date as the tax year.

How Can I File Self Employed Tax in the UK?

You can file your self employed tax online. The first step is to register for self-assessment before filing the self-employed tax.

There are different ways to register. For the self-employed, you need to register for Self Assessment and Class 2 National Insurance if you did not send your tax return in the past year. You must register by 5th October in your business second tax year. HRMC will fine you for failing to do so.

To register for Self Assessment Tax Return, click here. Complete all the questions and HMRC will create your account.

Within 10 days, you should receive a letter. It will contain your 10 digit Unique Taxpayer Reference. When filing a return, you’ll need your Unique Taxpayer Reference or UTR. After a couple of days, you will receive another letter containing your activation code. If you fail to receive this letter, visit HMRC services online.

Once you activate your account, you can start filing your self-assessment tax returns before the deadline.

You cannot file your self-assessment tax returns online…

For a trust or estate
If you received income from a trust
For a partnership
If you’ve lived abroad as a non-resident

To file your tax return, your need to prove your identity using the Government Gateway or GOV.UK.

National Insurance for Self Employed

Self-employed persons must make Class 2 and Class 4 contributions (depending on how much they earn). For the 2020-21 tax year, self-employed persons need to pay a flat rate of £3.05 per week. This is for earnings/profits between £6,475 and £9,500.

For the 2019-20 tax year, Class 2 contributions payable on earnings between £6,365 to £8,632 was at the rate of £3 a week. If your profits are £8,632 or more in 2019-20 or £9,500 in 2020-21, you will pay Class 4 National Insurance contributions. If you’re over the threshold, you’ll pay 9% on profits between £8,632 and £50,000 in the 2019-20 tax year and 2% above this.

The National Insurance Class 2 contribution covers benefits such as State Pension. Its paid by anyone earning an income through self-employment and employment. To pay your National Insurance contributions, you’ll have to submit a Self Assessment tax return.

In your tax return, you need to declare your expenses and total income.

Value Added Tax or VAT

Value Added Tax is a tax charged on things like commission, business goods used for personal reasons and many more. These are taxable supplies. VAT registered businesses must charge VAT on their goods and services. They must account for import VAT on their VAT return and may reclaim any VAT paid on business-related goods or services.

As a self-employed individual running a VAT registered business, you must report the amount of VAT you’ve charged to HMRC. Do so through your VAT Return due every 3 months.

There are three different rates of VAT…

Standard rate
Reduced Rate
Zero Rate

Learn more about VAT rates.

The standard rate of VAT is 20% which increased from 17.5% on 4th January 2011 while the reduced rate is 5%. Some items are exempt from VAT. They include postage stamps, property and financial transactions. If you charge any of your customers more VAT than you paid for your purchases, you need to pay the difference when you file for VAT returns to HMRC.

Capital Gains Tax

Capital Gains Tax is a tax on profit when you dispose of or sell an asset. In the UK, you’ll pay Capital Gains Tax when you sell:

Personal possessions worth £6,000 or more
Property that’s not your main home
Shares
Business assets and others.

These are chargeable assets. You only pay Capital Gains Tax on your overall gains above your tax-free allowance. Tax-free allowance is:

£12,300
£6,150 for trusts

To calculate your total taxable gains, work out the gain for each asset you disposed of in the tax year. Add the gains from each asset and deduct any allowable losses. If your taxable gains are above your allowance, you need to report and pay Capital Gains Tax.

If your total gains are less than the tax-free allowance, you do not have to pay tax, but you still need to report your gains if the following apply:

You’re registered for Self Assessment
The total amount of assets sold is more than four times your allowance.

Corporations Tax

Corporations tax is a tax imposed on the capital or income of corporations. In the UK, if you do business as a limited company, a foreign company with a UK branch, a co-operative, or club, you need to pay Corporation Tax. Corporations do not receive a bill for company tax. They must pay and report the tax.

First, companies need to register for Corporation Tax and PAYE. This usually happens at the same time when registering with Companies House. If you registered your company by post, third party software or using an agent, you need to register for Corporation Tax separately. If running unincorporated associations, write to HMRC.

Second, you must keep accounting records and prepare a Company Tax Return. This will enable you to know how much Corporation Tax to pay. Report and Pay Corporation Tax by your deadline. This is usually 9 months and one day after the end of your accounting period. You should also file your Company Tax Return. Do this before your deadline – 12 months after the end of your accounting period.

Final Thoughts…

It’s important to file your self-employed tax returns before the deadline. There are fines and penalties for missing the deadline. If you miss the deadline, an automatic penalty of £100 for late filing is usually charged. If you make a mistake on your tax return, you can amend it. You still have 12 months from 31st January. This applies whether you filed manually or online.

If you have problems completing your self-employed tax return, contact HMRC for help.