Don’t see them as a burden, think of your valuable contribution to the economy - here’s what you need to know about self-employment taxes
This article will cover the following:
What is self-employment tax?
Self-employment is an umbrella term for the various taxes you are required to pay as a self-employed person.
You must register with HMRC as soon as you become self-employed. The latest you can register without incurring penalties is by 5 October, after the end of the tax year during which you became self-employed. The tax year runs from 6 April to 5 April of the following year.
The current personal allowance for the year 2019/20 – i.e. the amount you can earn before it is taxed – stands at £12,500 (up from £11,850 the previous year).
This allowance will apply unless you start to earn over £100,000, in which case your personal allowance of £12,500 is reduced by £1 for every £2 of income you earn over £100,000.
For example, if you were to earn £110,000 in one tax year, your untaxed personal allowance would decrease to £7,500.
Who should pay self-employment tax?
Your status as a self-employed person might not be as clear as it first appears. For example, you may be officially employed in one job, but self-employed in another.
The HMRC website features an anonymous tool that allows you to check your employment status for tax.
It basically comes down to:
- Your responsibilities
- Who makes the decisions
- Who decides when, where, and how the work is done
- How the worker will be paid
- Whether the arrangement includes any benefits or reimbursement for expenses
Self-employment tax calculator
Self-employment tax breaks down into several different components, including income tax, National Insurance (NI), and Capital Gains Tax.
The various bands are liable to fluctuate on an annual basis at the whims of the chancellor and the treasury.
It’s good to keep your eyes on the government’s Autumn Budget so you can estimate how much you’ll be paying in taxes each year.
Income tax thresholds
As a self-employed person, you are subject to the same tax bands as everyone in full-time employment.
However, you are only taxed on your profits, not your whole income. Your profits are simply your total income minus your business expenses.
The table below breaks down the different tax bands for the 2018/19 year, as well for 2019/20.
|Tax band/rate||Threshold 2018/19||Threshold 2019/20|
|Personal allowance: 0%||£0 to £11,850||£0 to £12,500|
|Basic rate: 20%||£11,851 to £46,350||£12,501-£50,000|
|Higher rate: 40%||£46,351 to £150,000||£50,001-£150,000|
|Additional rate: 45%||Over £150,000||Over £150,000|
If you earn £60,500 in the tax year 2019/20, you will pay:
- No tax on the first £12,500
- 20% tax on £37,499 (the difference between £12,501 and £50,000
- 40% on £10,499
Self-employed National Insurance contributions
Paid by both employees and employers, NICs grant you access to state benefits such as the NHS, a state pension, unemployment benefits, and sickness and disability allowance.
For 2019-20, the NI bands have changed. These will be effective when you pay NICs next year.
For sole traders, the bands will be as follows:
- Small profits threshold – increase from £6,205 to £6,365 (you start paying Class 2 NICs if you earn more than this)
- Class 2 NICs – the flat rate will increase from £2.95 per week to £3.00 per week
- Class 4 NICs thresholds and limits – the earnings threshold before you start paying will increase from £8,424 to £8,632 (you pay 9% of profits between £8,632 and £50,000 per year – up from £8,424 and £46,350 – as well as 2% of what you earn above that)
For limited company directors, NI contributions for 2019/20 will be:
- Secondary threshold for employer NICs – increases from £8,424 to £8,632 (you’ll pay employer NICs of 13.8% on annual salary payments above this threshold)
- Employee NICs – pay 12% of earnings between £166 and £962 per week – up from £162 and £892 per week (you pay 2% on any earnings above £962 per week)
Capital Gains Tax allowance
Capital Gains Tax is what you pay if you make a profit (gain) when you sell all, or part, of a business asset.
This could include:
- Land and buildings
- Fixtures and fittings
- Industrial plants and machinery
- Registered trademarks
- Your business’ reputation
In order to determine whether you owe Capital Gains Tax, you need to work out your gain – the difference between what you paid for your business asset and what you sold it for.
In the 2019/20 tax year, you are allowed up to £12,000 tax free when you sell assets that qualify for Capital Gains Tax.
Basic rate taxpayers pay 10% on profits above the allowance. Higher and additional rate taxpayers pay 20%.
If you own shares in a company, you pay tax on dividends. Your dividend allowance is how much you can earn in dividends before tax.
The dividend allowance was reduced from £5,000 in the tax year 2017-18, to just £2,000 for 18/19. There have been no further changes made for the coming tax year.
The amount you’re taxed over your allowance depends on which income tax band you’re in.
To work out your tax band, you have to add your income from dividends to any other taxable income you’ve made.
|Tax band||Tax rate on dividend|
You get £5,000 in dividends for 2019/20. As your allowance is £2,000, you pay tax on £3,000 of your dividends.
You also earn £52,000 in taxable income that year.
This puts you in the higher rate tax band, so you pay 32.5% on £3,000 of dividends.
Self-employed tax returns
You should be aware of your self-assessment tax return and bill deadlines. Unless you have a legitimate reason for not filing your tax return and paying on time, missing these deadlines could incur penalties.
As well as paying tax for the previous year, you have to make payments for the current year called ‘payments on account’.
The deadlines fall on the same days every year:
- 31 January – balancing payment for previous year and first payment on account
- 31 July – second payment on account
Need help filing your tax return? Other than an accountant, the best thing you can do to simplify your self-employed taxes is invest in some payroll software. Read our guide to small business payroll software to find out more.
Making Tax Digital
Making tax Digital (MTD) has been introduced to overhaul the current system and make it easier for individuals and businesses to manage their taxes.
In doing so, the government hopes to plug an avoidable £9bn annual shortfall for the treasury.
So far, MTD only covers VAT. Any VAT-registered businesses with a taxable income over the VAT threshold – which currently stands at £85,000 – must use the MTD-approved software to keep digital records, and submit VAT returns.
You can read a comprehensive guide to Making Tax Digital for VAT here.