Updated for 2018
If you become self-employed you need to take care of your own tax and National Insurance payments. This means filing an annual tax return with HMRC. When you become self-employed you must let HMRC know within three months, even if you already complete a tax return.
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You can advise HMRC of your self-employed status by calling the Newly Self-employed Helpline on 0300 200 3504.
Do you need to complete a tax return?
All self-employed people must complete an annual Self Assessment. Tax rates vary depending on whether you are an employee or self-employed so it’s important to be sure which category you fall into before you register with HMRC. It is possible to be self-employed for some work but also employed by another company as well.
There are different rules if you work through an agency, if you’re a company director or if you’re the secretary of a club or holder of another office. Otherwise you are considered self-employed if: you have the final say in how the business is run; you are responsible for meeting losses as well as profits; you can hire someone on your own terms to work for you; you decide what work to do, how you do it and where to provide the services; if you regularly work for other people; and if you complete unsatisfactory work in your own time and at your own expense.
For more details about employment status, visit the HMRC website.
If you are self-employed, HMRC will send you a paper tax return each year or you can register to complete the Self Assessment online.
How to complete a tax return
You must choose whether to use a paper tax return or to register for online Self Assessment. Paper tax returns are due by October 31st following the end of the tax year, which is April 5th. Online tax returns are due by January 31st following the end of the tax year.
Online Self Assessments are generally easier than struggling with the paper version, especially if you don’t have an accountant to help you. The online tax return will help you to select only the relevant sections for your business and income and it will calculate the amount of tax due instantly. It is important that you pay the correct amount of tax though, so if you are unsure it may be wise to get an accountant or someone else to look over it.
If you are self-employed there may be certain expenses that you can gain back in tax relief. There are three kinds of expenditure to consider: capital, business and private. The rules and relief on each of these are different. You can get detailed advice about which expenses are allowable and what aren’t here.
Tax rates, National Insurance and allowances
If you are self-employed you pay the same income tax rates as those in employment but you will need to consider other types of tax such as VAT and other allowances from business expenses. You will also pay different National Insurance contributions.
The personal tax allowance is £11,850 for the year 2018/2019.
Income tax for 2018/19 is 20% between £11,851 and £46,350, and 40% between £46,351 and £150,000. Income over £150,000 is charged at 45%.
National Insurance contributions (NICs) are more complicated. You are obliged to pay Class 4 NICs of 9% on annual profits between £8,424 and £46,350, and 2% on any profit over that amount. Payment is made through your Self Assessment.
Class 2 NICs are paid by most self-employed people except those who are under 16 or over state pension age. Women who are married or widows are entitled to pay reduced rate Class 1 NICs.
Class 2 is set at a weekly rate of £2.95 (2018/19).
Paying your tax bill
If you are registered online you can pay your tax bill by direct debit. You can set this up through your Online Self Assessment account. You can also pay directly from your bank. Make sure you give your Self Assessment reference number when you may payment so that they know who the money is coming from!
If your payments are up to date but you can’t afford to pay a lump sum, you can set up a Budget Payment Plan. This will allow you to make regular payments towards your tax bill. You can set this up using the direct debit facility in your HMRC online account.
Looking for self-employed insurance?
With Simply Business you can build a single self employed insurance policy combining the covers that are relevant to you. Whether it’s public liability insurance, professional indemnity or whatever else you need, we’ll run you a quick quote online, and let you decide if we’re a good fit.