The Tax system for self-employed and the main things to consider
Registering with HM Revenue and Customs HMRC
If you start working for yourself, you must register with HMRC by 5 October following the end of the tax year in which your self-employment starts. Otherwise, you may be liable to penalty based on the tax due to HMRC.
There are four ways that you can register:
Once you become self-employed, the tax rules are quite different from those that may have applied when you were an employee. Instead of tax (and national insurance) being deducted from your earnings at source, you must be prepared to receive a bill at some time in the future. This can be a nasty shock if you haven’t put enough money aside.
We aim to give you as much warning as possible of the likely timing and amount of tax payments, but it is not easy to do this during the first year of your new business, or if you do not keep your records up-to-date.
Calculating your Profit/Loss
In calculating taxable profits you are entitled to claim deductions from your business income in respect of any expenses incurred for the purposes of trade (with a few minor exceptions).
For most of the equipment you buy and business expenses you make for your business, you will be entitled to deduct the full cost. Tax is payable on the whole of the profits of a trade, (after deducting your Personal Allowances of £12,570 for 2021/22 tax year) so payments for your own ‘wages’ (drawings) are not deductible. However, if your spouse works in the business, the wages are an allowable deduction, provided they are actually paid and are a reasonable reward for what is done.
In terms of the National Insurance - The self-employed are subject to Class 2 NICs at a flat rate of £3.05 per week if earnings exceed £6,475 per annum.
Profits between £9,500 and £50,000 are subject to Class 4 NICs at a rate of 9%. Any excess of profit above £50,000 is subject to Class 4 NICs at the rate of 2%, without any upper limit. Class 4 NICs are collected by HMRC and are payable at the same time as the instalments of income tax.
Payments for self-employed Class 2 NICs and other Taxes are due on 31 January following the end of the tax year.
How is the tax collected?
Tax returns covering income for the year ending 5 April 2021 have to be submitted to HMRC by the ‘filing date’ which is 31 October 2021 for paper returns and 31 January 2022 for online returns. The return will include a self-assessment of your liability to income tax and capital gains tax.
There are automatic penalties for the late filing of tax returns.