If you’re self employed then you’re responsible for ensuring you pay the correct amount of tax and National Insurance contributions. But, with lots of different rules and regulations it can be tough to work out exactly what you should be paying.
Our guide will help you work out when you should start paying tax as a self employed person. Keep reading to learn more.
Income Tax is a tax on income. However, not all income is taxable and you’re only taxed on ‘taxable income’ above a certain level. And, you can also claim other tax reliefs and allowances which reduce your income tax bill.
Your self-employment earnings are counted as ‘taxable income’.
Nearly everyone who is resident in the UK for tax purposes receives a ‘Personal Allowance’. This is an amount of income you are allowed to earn each tax year before you start paying tax.
In the 2011/2012 tax year the basic Personal Allowance is £7,475. So, if your total taxable earnings in this tax year are under £7,475, you will generally pay no income tax.
You may also be able to claim a higher Personal Allowance if you’re aged 65 or over.
There are also other allowances that you may be able to claim – for example if you
National Insurance contributions
If you’re self-employed you will also pay Class 2 and Class 4 National Insurance contributions.
Class 2 National Insurance contributions are paid by all self employed people at a flat rate of £2.50 per week. However, if your profits are expected to be less than £5,315 you may not have to pay Class 2 National Insurance contributions.
Class 4 National Insurance contributions are paid as a percentage of your annual taxable profits. If your self-employed profits are between £7,225 and £42,475 you will pay 9 per cent. You will also pay a further 2 per cent on profits over that amount.
If you earn under £7,225 you will pay no Class 4 National Insurance contributions.
Value Added Tax (VAT)
If you are self employed, your business may also have to pay VAT. If you’re a VAT-registered business, in most cases you will charge VAT on the goods and services you provide whilst simultaneously reclaiming the VAT you pay when you buy goods and services for your business.
The main threshold for registering for VAT is £73,000. This means that if your turnover of VAT taxable goods and services supplied within the UK for the previous 12 months is more than £73,000 (or you expect it to go over that figure in the next 30 days alone), you must register for VAT.
If your turnover is under £73,000 you won’t pay any VAT. However, you won’t be able to reclaim the VAT you have paid when you buy goods/services for your business.
If you are VAT registered you will normally complete a VAT return on a quarterly basis. There are three rates of VAT:
• Standard rate of 20 per cent
• Reduced rate of 5 per cent
• Zero rate of 0 per cent
VAT is paid on most goods and services in the UK at the standard rate.