Taxation for the Self-Employed
With the introduction of Pay As You Earn, or PAYE, the system of income tax payment became far simpler for employees; no action on the part of the taxpayer was required, as the entire process was carried out by the employer, who simply paid the tax out of wages. The benefits of PAYE have not, however, been passed onto the self-employed. In these cases, it is your own responsibility to pay your income tax and National Insurance contributions.
Registering as Self-EmployedIn the first instance, you must ensure that you are registered as self-employed with HM Revenue and Customs. You can do this online or by post, and you must do it promptly - if you fail to register within three months of the end of your first month of self-employment, you run the risk of incurring a penalty.
As soon as you are registered, you become a Self Assessment taxpayer. This means that you are required to fill in a form at the end of every tax year, detailing your income. This must then be returned to HMRC in order that they can calculate how much tax you must pay. You will receive a Self Assessment every April and, if you send it back by 30th September, HMRC will calculate your bill for your. Otherwise, you will have to work it out yourself, but you must still return it by 31st January to avoid a penalty.
You will receive one of two Self Assessment forms, depending on the complexity of your tax affairs. If your affairs are fairly simple, you will only be required to fill in a four page form. Otherwise, you will receive a ten-page document which will require more detail. In either case, it is vitally important that you keep good records of all of your income and expenditure throughout the year in order that you can fill in your return accurately.
National InsuranceIf you are self employed, you will also pay your National Insurance Contributions (NICs) in a different way. Employees pay one Class of NIC, with the size of their contributions depending upon their income. As a self-employed individual, however, you will probably be required to pay two separate Classes. You will have to pay Class 2 NICs at a flat rate of £2.75 per week, unless your earnings are below £5,885. Furthermore, you will have to pay Class 4 contributions at a rate of 9% on all earnings between £7,956 and £41,865, and at a rate of 2% on all earnings above that. It is also worth noting that Class 2 NICs pay for benefits like the State Pension and Maternity Leave; they do not count towards the additional State Pension, Statutory Sick Pay or Jobseeker's Allowance. As a result, you may wish to consider taking out a personal pension in addition to your National Insurance contributions.
Although the process of paying your tax as a self-employed person may seem complex, you should bear in mind that you are not alone - many thousands of people fill in the same form every April. Ensure that you keep good records throughout the year, and you shouldn't have any major problems. Good luck!