When you’re self employed it will be your responsibility to look after your financial affairs, and that includes paying your income tax and National Insurance contributions.
Our guide looks at how and what tax and National Insurance you will pay.
Self Assessment and Paying Income Tax
If you’re self employed then you will have to complete a Self Assessment tax return every year. Your tax return details all the income you have received in a tax year and all the expenses you are entitled to claim to reduce your tax liability.
You then pay income tax based on your earnings/profits. The tax rates for the 2011/12 tax year are:
• 0% on the first £7,475 that you earn (this is your Personal Allowance)
• 20% on the next £37,400 that you earn
• 40% on the next £112,600 that you earn
• 50% on anything over this
The amount of tax that you’ll pay will depend on your specific circumstances including what tax allowances you are eligible to claim.
If you were sent a tax return (or a letter telling you to send in a tax return if you file online) by the previous 31 October, then you must pay HMRC any balance of any tax you owe by 31 January.
You may also have to make a ‘payment on account’ by 31st January for the current tax year. This is a payment based on an estimate of the tax you will have to pay in the current tax year. You then make the second ‘payment on account’ by 31 July for any tax owed for the previous tax year.
Paying National Insurance Contributions
When you become self employed you are obliged to tell HMRC straight away – even if you are submitting a Self Assessment tax return already. When you do this you will also be registered to pay your National Insurance contributions.
If you’re self-employed you pay Class 2 and Class 4 National Insurance contributions at the following rates (2010/11 tax year):
• Class 2 National Insurance contributions are paid at a flat rate of £2.50 a
• Class 4 National Insurance contributions – you pay 9 per cent on any profits between £7,225 and £42,475, and a further 2 per cent on profits over that amount
You pay your Class 2 National Insurance contributions by monthly or six monthly Direct Debit while once you have worked out your Class 4 National Insurance contributions on your tax return, you pay them alongside your Income Tax.
Do you have any advice that you’d give to newly self employed people regarding their tax and National Insurance affairs? If so, please share it with us in the comments below.