Paying your Tax and National Insurance for self-employed
We love talking about tax and national insurance… so you don’t have to!
As a self-employed, you pay 3 different types:
Income tax on your business profits
This is taxed in the same way you would be taxed in a job. If your total income declared is below the personal allowance, there is no tax to pay. If above that amount, the tax is based on how much your profits have gone over the personal allowance. For 2019-20 tax year, the tax is 20% if you’ve gone over by up to £37,500. Above that, it is 40% up to £150,000 and then 45%.
Class 2 National Insurance
This is a weekly amount paid to HMRC, set at £3 per week for the 2019-20 tax year. For 2020-21 tax year it is £3.05 per week. In most cases, this is collected via your self-assessment tax return.
Paying this amount will ensure you qualify for state benefits such as State Pension.
Class 4 National Insurance
This is payable to HMRC, as part of your self-assessment tax return calculation. However, this only applicable for those whose sole trader profits are above the “Lower Profits Limit” for that tax year (see table below). If above this amount, but below the “Upper Profits Limit” (see table below), you pay 9% of that amount to HMRC. Below the lower limit, you don’t pay this. Above the upper limit and you pay 2% on anything above that threshold.
In almost all cases, all of the above is usually calculated and collected via your self-assessment tax return. Fear not… whether you’re completing your tax return directly on HMRC’s website, using a software or asking your accountant to do it, you won’t have to do the calculations yourself… Phew!
Once calculated, the payment to HMRC must be made by 31st January following the end of the tax year (5th April). So for example, for tax year ending 5th April 2020, any payments due to HMRC must be made by 31st January 2021.
If your tax and national insurance bill is above £1,000, HMRC will also collect an additional 50% as a payment in advance for the following tax year at the same time, along with another 50% payment to be made by 31st July.
When you actually file your tax return for that year, any balancing adjustment would be paid/refunded back, and the whole process starts again.
Sounds confusing? Don’t fall foul of HMRC legislation!
If you need to register as self-employed with HMRC, you must inform HMRC, register for and complete a self-assessment tax return. If not already registered to file one, you must do so immediately.