Inside: How to Organise Your Taxes When You’re Self-Employed. Collaborative post.
There are plenty of benefits to being self-employed but having to make arrangements for your taxes certainly isn’t one of them.
For many people, venturing into the world of self-employment is a no brainer. While the phrase ‘be your own boss’ may seem like little more than a cheesy cliché, it does encapsulate what it means to be self-employed quite nicely.
That said, being self-employed isn’t always as simple as it’s made out to be. There are several considerations you need to make when you’re not employed by a wider business or organisation, including how you go about paying tax and national insurance when it isn’t automatically deducted from your earnings.
Failing to accurately organise your taxes when you’re self-employed could lead to you facing a tax investigation, so it should go without saying that it’s vital to get it right!
In this post, we’ll be providing some clarification and guidance on how you can organise your taxes when you’re self-employed, as well as some handy tips to keep in mind to streamline the process.
So, if you’re self-employed and taxes tend to get you in a bit of a muddle, be sure to read on below…
Who is Self-Employed?
First things first, it’s important to clarify what it means for someone to be ‘self-employed’. When you start working for yourself, the government classes you as a ‘sole trader’. This means that you’re technically self-employed, even if you haven’t told HM Revenue and Customs (HMRC).
It’s also possible to be both employed and self-employed at the same time, such as if you work for an employer during the day and for yourself in the evenings.
If you aren’t sure whether you class as self-employed, HMRC has a website tool that can work out your employment status based on a series of questions. This won’t give you a definitive answer, but it will provide an indicator of you what your employment status is.
How Do You Register as an Official Sole Trader?
While you don’t have to tell HMRC to be considered self-employed, it’s strongly encouraged that you do. Only this way can you make sure that your taxes are fully in check and that you won’t stumble into trouble further down the line.
To set up as a sole trader, the following need to apply:
- You must have earned more than £1,000 from self-employment between a tax year
- You need to prove that you’re self-employed to claim certain benefits, such as tax-free childcare
- You want to make voluntary Class 2 National Insurance payments to help you qualify for benefits
To set up as a sole trader, you need to register for Self Assessment with HMRC, which allows you to file an accurate tax return every year.
How Much Can You Earn Tax-Free When Self-Employed?
If you’re self-employed, you’ll be entitled to the same tax-free personal allowance as someone who is employed. For the 2021-22 tax year, the standard personal allowance is £12,570 – this is how much you can earn before you need to start paying income tax.
How Does Income Tax Work When You’re Self-Employed?
When you’re self-employed, you pay Income Tax on your trading profits, rather than your overall income. To calculate your trading profits, you simply need to deduct business expenses from your total income.
As mentioned, you don’t need to pay Income Tax if you earn less than £12,570 during the 2021-22 tax year. However, as soon as you earn more than this figure, you will be required to pay a certain rate of Income Tax.
If you earn between £12,571 to £50,270, you pay 20% tax on your profits. This rises to 40% when you earn between £50,271 to £150,000 and then to 45% when you earn over £150,000.
It’s important to remember that you only pay the rate of Income Tax on your trading profits in the bracket. So, if you earn £55,000 a year, you would be taxed 20% on the trading profit between £12,571 and £50,000 and 40% on the trading profit between £50,001 and £150,000.
Paystub.org, for example, offers a flexible and straightforward Form W-2 generator that lets employers and employees produce several W2 forms effortlessly.
If you still aren’t sure what you will have to pay, you can calculate your Income Tax contributions if you’re self-employed on the GOV.UK website. Additionally, if you’re setting aside money each month for your tax bill, it can help to estimate how much your savings may grow over time. Using a simple interest calculator can give you a clearer picture of how much interest you might earn before your payment is due.
How Does National Insurance Work When You’re Self Employed?
If you’re self-employed, you’ll also be required to pay National Insurance. Most self-employed people pay Class 2 National Insurance Contributions (NICs) if their profits are at least £6,515 during the 2021-22 tax year. You will usually pay Class 4 NICs if your profits are £9,569 or more a year.
If you make Class 2 NICs, you’ll pay £3.05 per week. If you pay Class 4 NICs, you’ll pay 9% on profits between £9,569 and £50,270 and 2% on profits over £50,270.
Quick Tips for Organising Your Taxes When Self-Employed
Keep Clear Records of Profits
If you want to be sure that you’re paying the right amount of tax, you must keep clear and accurate records of your profits. Even if you make an honest mistake, this could potentially lead to a tax investigation!
Make Small Updates Regularly
The last thing you want to do is to spend hours putting everything together right before the tax return deadline. You can avoid this by making small updates throughout the year, so everything is in order when the time comes to submit your return.
Make the Most of Government Tools
There are plenty of government tools you can use which can give you a clear idea of how much you will need to pay in tax. There’s no need for a calculator or mental arithmetic!
Do You Have Any Further Questions About Paying Tax When Self-Employed?
In this post, we’ve taken a look at how you can organise your taxes if you’re self-employed, as well as providing some further insight into what you might be expected to pay, depending on your individual circumstances.
Have you got any further questions about paying tax while self-employed? Feel free to leave them in the comments below!
Please be advised that this article is for general informational purposes only, and should not be used as a substitute for advice from a trained financial professional. Be sure to consult a financial advisor if you’re seeking advice on your finances. We are not liable for risks or issues associated with using or acting upon the information on this site