Individuals considering going self-employed are often worried about the extra tax commitments they will have to take on. There are many benefits to working for yourself – such as flexible working hours and the ability to work from home – but having to manage tax is certainly not one of them. Being self-employed means that the individual cannot work for just one company, or have a single employer.
Self-employed individuals conduct work for multiple clients over the course of each financial year, and do not have the same employment rights as regular employees. Anyone who is a contractor, or a freelancer, is likely to be self-employed.
Self-employed individuals have extra tax responsibilities than those who are administered through the PAYE system, but they do pay a lower rate of National Insurance. If normally employed, an individual’s employer automatically deducts income tax and National Insurance from pay cheques and pays it to HMRC. Self-employed people, on the other hand, are responsible for paying their own tax to HMRC, and are also solely responsible for any missed deadlines. Self-employed people receive the full amount of any income from clients, instead making an annual tax payment based on a review of their earnings, called a self-assessment. To complete a self-assessment, it’s necessary to register with HMRC as self-employed. Individuals can do this through the HMRC website, or by calling HMRC’s helpline. Failing to register as self-employed within three months of starting work can result in a fine.
Depending on the complexity of the self-employed individual’s work, it can be difficult to keep the paperwork properly organised. It’s a legal requirement to keep records of all sales and purchases. These records are needed to complete the self-assessment form, and to prove claims if the taxman asks for evidence. This might be the reason why it is advisable for self employed individuals to hire an experienced accountant who could take care of all the paperwork associated with taxes and finances. That said, HMRC also allows individuals to claim expenses, on which they will not have to pay tax. They can claim for work-related expenses, like money spent on business rent, stationary and computer equipment. To claim expenses, it’s essential to be able to provide evidence if required. As a result, receipts should also be saved and stored safely. HMRC says that all records need to be stored for at least five years, and in some cases longer. Records can be stored as hard copies, or electronically.
Most self-employed individuals have to pay income tax, as well as Class 2 National Insurance – which is currently set at a flat rate of 2.65 per week. Individuals earning less than 5,725 can apply for a Class 2 exemption, however. Anyone earning over 7,605 will also have to pay Class 4 National Insurance Contributions, which are set at 9% of earnings up to 42,475. Any further earnings are taxed at 2%. The tax year runs from the 6th of April through to the 5th of April in the following year.
HMRC sends self-assessment forms to individuals between April and May each year, and these are to be completed relating to the previous financial year’s activities. The deadline for online completion is the 31st of January, and for paper returns it is the 31st of October. Any outstanding payments for the previous year also need to be received by the 31st of January.