How Much is the Tax on Self Employed Income

Self-Employment Income Tax

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Most types of income are charged with taxes, including grants, benefits, pensions, and many other kinds of revenue-generating sources. In this article, you will learn what it really means to be self-employed, how to become legally self-employed, brief aspects on tax relief, and more. Being your own boss has its freedom but always with one legal commitment, which is paying your tax on self-employed income.

What Is Self-Employed Income Tax?

The tax that self-employed individuals pay is called income tax. Generally, if you are self-employed, you will also be contributing to your national insurance and VAT (Value Added Taxes), in some cases.

To determine if you are going to pay income tax, you will need to clarify whether your status is employed or self-employed. Identifying which of the two you belong to may sound like a simple task, but overlaps may happen anytime. You may experience being listed as employed in one area while considered
self-employed in another.

It is possible to be both—employed and self-employed—since you can always work, for instance, in a particular profession in a day, and then get to working for yourself right after, as in the evenings. What is important is that once you recognize you are already working for yourself, you should report to the HMRC (HM Revenue and Customs) right away so you can register legally as self-employed.

Employees, on the other hand, receive an income that must go through the PAYE (Pay As You Earn) system, meaning they will not be paying income taxes separately as their taxes will be through this system. This is one huge distinction between employees and self-employed individuals.

Using the Status Indicator for Your Employment Status

There is a tool you can use to determine your status of employment, called CEST, which stands for Check Employment Status for Tax. Whether you are an employee, agency, or hirer, you can use this tool to determine your status or others’ (e.g., your employees). Whether you answer for yourself or employees, make sure you come prepared with the details that will be asked in the CEST.

The questions in the CEST tool include the following: the role or obligations in the job, who has the power to decide on what task is to be accomplished as well as where, how, and when they are to be fulfilled, how you or they obtain the pay, and if the contract comprises of any compensation for the operation costs and other corporate benefits.

Clarifying your employment status helps you to determine whether you should be paying through PAYE or income tax.”

The more accurate your answers, the more reliable the result would be. As much as possible, get your contract ready or that of your worker if you are determining statuses on their behalf.

You may use this status indicator guide or consult tax professionals to determine employment statuses. Legend Financial can help guide you on the next steps to take.

What Is Considered Self-Employed?

What does it really mean to work for yourself? Basically, you are the boss of your own business, company, or trade, so you do not go with the usual employee rights and obligations.

Self-employed status comes in various names—independent worker, gig worker—and of distinct types. But generally, when you work for yourself, you are termed self-employed in the UK, classed as a sole trader.

Being self-employed, you may check yourself on these boxes:

  • You take full charge of the business, both when it fails or succeeds.
  • You implement your time, place, and method to accomplish the task and answer yourself in terms of deadline.
  • You service numerous customers simultaneously and so, must hire for extra workforce to help you do your job.
  • You are the one who provides the charge for your product or service.
  • You are making profits with your goods, whether tangible or intangible.

Self-employed individuals are not under the PAYE system, don’t have the normal employee obligations and rights, and own or partner with a business or company.”

What Are the Tax Rates Imposed on the Self-Employed?

Self-employed individuals pay income tax on the earnings from their trade, not their overall gain. In fact, you can get a rough estimate of your income tax just by subtracting the running costs of your business from your trading income. But the income tax amount that you will pay against your trading income being self-employed is like those that are employed.

To get a comprehensive discussion about the tax rates imposed on the self-employed, read our article regarding tax rates. You may also opt to reach our tax professionals at Legend Financial since certain unique tax situations may make it a little bit complex for you to calculate your income tax. You may also find that you are eligible for many other tax allowances that could serve as your tax relief.

How Can You Register as Self-Employed?

Once you start working for yourself, you will have to pay your income tax. The first step is to register with the HMRC that you are self-employed. The registration process can be straightforward, but since this is a crucial process toward legalizing your business, it’s best that you work with tax professionals so you will not skip on anything.

Generally, take note of this process for the registration:

  • Figure your employment status
  • Register for Self-Assessment
  • Get your email with the UTR number and instructions
  • Submit your tax returns
  • Pay your income tax, national insurance, and possibly VAT

Having determined your employment status, the process is streamlined all the way from there. You have the option to apply online or through paper, but even so, HMRC expects that you are registered for Self-Assessment by applying online.

You sign up online through your business’ tax account. But if you have no log-in credentials yet, tax professionals at Legend Financial can create one for you and work through this process on your behalf.

Simply ensure that you prepare the details required during the registration, which include the specific date of your business’ incorporation, details on your work, and all the other pertinent, basic information such as your home address and National Insurance number.

Once the registration is completed for Self-Assessment, HM Revenue & Customs allocates a Unique Tax Reference to your record and this is then received in the post. It then follows on the next steps after being registered and further guidance notes are accompanied with it.

How Can You Register as Self-Employed?

The UTR is normally issued within 10 to 14 working days, but some factors might delay this timeline and you may even need to recontact HM Revenue & Customs for a follow-up.

Alongside the UTR number, the letter or email also encloses the instructions and reminder for you to finish filling out your Assessment tax return so that you avoid submitting it beyond the HMRC’s deadline. To submit on time, finish the tax return right after you receive the email.

Keep in mind the deadlines for submitting your tax returns to avoid being penalized by the HMRC.”

Every tax year, there is a set deadline for you to finally straighten up your employment status record, especially when the status check shows that you are self-employed. Regardless of the date you begin working as self-employed, by the 5th of October next year (indicating the conclusion of the tax year), it is your obligation to be legally registered as one.

This means that by the second year of your business, company, or trade, you should already be registered legally self-employed. See to it that you are complying with the deadline that the UK government had set to avoid facing surprisingly hefty tax bills and fines, which can easily befall upon your business if something ever goes wrong.

Enlisting for VAT is conditional. This is so when you already generate profit that reaches beyond £85,000. In some instances, you may decide to sign up for it when it is convenient for your business, particularly when it’s involved with other businesses that are VAT-registered. You may qualify for reclaiming your VAT when you trade with these businesses.

What Happens When You Lose Your UTR Number?

Having prepared certain details already, the next filing of tax return would be easier. However, some taxpayers may misplace their UTR numbers. If you are in the same situation, you can simply look back at the details of your tax return, which may consist of your reimbursement, notices, and tax account.

If you are unable to find your UTR number, not have any copies of the documents mentioned above, you can always turn to the Self-Employed helpline to find your files.

For Those Who Skipped on Filing the Tax Return Online

If you did not sign up online the first time, create a tax account for your business. Make sure the account states you are a business instead of as an individual. Use your previous credentials to log in to your existing account. Prepare your UTR number, which you should be doing from now on every time you file. Filing through paper, your UTR number may have been given to you in papers before.

There are alternative ways you can register as self-employed in the UK, such as by posting it to the HMRC. Tax professionals at Legend Financial provide the most fitting solution for your situation and guide you throughout completion.

How Much Is Tax-Free for Self-Employed Individuals?

The same UK tax rule for employees applies to self-employed persons. If you are self-employed, you would still receive the same tax-exempt limit for the year 2020 to 2021; that is, you will be given a personal allowance of £12,500. As long as your overall profit stays within the yearly tax-free personal allowance, you will not get billed on income tax for that fiscal year.

But when you have both the statuses, employed and self-employed, determining your personal allowance would get complex. Any of the jobs you have that gives you a bigger profit would weigh more than those you earn less from. So normally, the standard personal allowance would apply to the work that generates more income.

How Much Is Tax-Free for Self-Employed Individuals?

Allowances and Tax Reliefs You May Be Eligible For

There are two types of allowances you might be eligible to claim—trading income allowance or property allowance.

You may be eligible for a trading income allowance (or trading allowance) if your small business is earning up to £1,000 for the tax year or even less. This also applies to any miscellaneous or casual income that amounts to less than £1,000 or of that amount, and not just for the sales of your products or services.

On the other hand, you can claim a property allowance when you generate profit from your property, like renting your garage or driveway. For more information about the tax reliefs and allowances you may qualify for, take a look at our blog regarding tax relief.

Don’t miss out on your chance to reduce your tax obligations. Tax professionals at Legend Financial can help you maximize your allowances and claim your reliefs.

How Can You Pay for Self-Employed Income Tax?

Once you’re registered as self-employed, it’s your obligation to file a tax return and pay income tax every year (alongside your National Insurance contributions or VAT). With tax compliance checks going on annually, make sure you don’t miss out on your tax obligations. Let tax professionals at Legend Financial guide you all throughout, from registration to paying your income tax. For further enquiries about how we can help, reach us today.

References

Working for yourself. (n.d.). Retrieved from gov.uk: https://www.gov.uk/working-for-yourself

Check employment status for tax. (n.d.). Retrieved from gov.uk: https://www.gov.uk/guidance/check-employment-status-for-tax

What is the trading allowance? (n.d.). Retrieved from gov.uk: https://www.litrg.org.uk/tax-guides/self-employment/what-trading-allowance

Find a lost UTR number. (n.d.). Retrieved from gov.uk: https://www.gov.uk/find-lost-utr-number

Set up as a sole trader. (n.d.). Retrieved from gov.uk: https://www.gov.uk/set-up-sole-trader

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