Many people like to pit the terms ‘employed’ and ‘self-employed’ against each other as opposites. In the complex world that is HMRC, taxes and self-assessments, it is possible to actually be employed and self-employed at the same time. In fact, it is actually pretty common to be just this.
For example, you can work for an employer during the day and run your own business by night or on the weekend. There are some industries in which self-employed workers and contractors are more common, including the building, engineering and even teaching industries (source: JosTec) and so it will be particularly important to understand how to complete tax returns if you work in any of these industries. Whether you are self-employed full time or part time, you will need to pay tax depending on how much you earn per tax year.
When Are You Classed as Self-Employed?
You will be classed as self-employed if you:
- Run your business for yourself and take responsibility for its success or failure
- Have several customers at the same time
- Can hire other people at your own expense in order to help you or to conduct the work for you; common in industries requiring ad-hoc designers and creative professionals for example in the case of retail designers (more information)
- Can decide, how, when and when you do your work
- Are responsible for finishing any unsatisfactory work in your own time
- Provide the main items of equipment to do your work
- Charge an agreed fixed price for your work
- Sell goods or services in order to make profit (this includes through websites and apps).
Register as Self-Employed
In order to pay your taxes, you will need to register for Self-Assessment. You will need to do this if any of the following apply to you:
- You have earned more than £1,000 from self-employment between 6th of April 2017 and 5th April 2018
- You need to prove you are self-employed. For example, you claim Tax-Free Childcare.
- You want to make voluntary Class 2 National Insurance payments to help you qualify for benefits
If you do not need to register, you can still make voluntary Class 2 National Insurance payments. This could be to get a full state pension.
What is the Self-Employed Income Tax Rate?
For the 2018-19 tax year, the basic income tax will be 20 per cent. This applies to earning between £12,000 and £50,000. When it comes to earnings between £50,001 and £150,000, the rate is up to 40 per cent. For earnings which exceed £150,000 the rate is 45 per cent.
However, self-employed people can also offset some of their expenditure against tax. This means that they reduce their taxable income by simply deducting certain expenses from the overall amount. Speaking in general terms, you should be able to offset expenditure that is wholly and exclusively for business purposes, for example, accounting, a business phone and so on.
How Do You Pay Tax if You Are Self-employed?
Rather than paying through PAYE like an employee would, self-employed people will file an annual Self-Assessment tax return. This also applies to company directors. You need to register for Self-Assessment when you first go self-employed. There will be penalties if you fail to do this or if you do this late. Therefore, you need to make sure that you register promptly.
Once you have registered, you will be required to complete an annual Self-Assessment tax return, usually by 31st of January each year. You should also remember the payment on account. Under this particular system, you should pay 50 per cent of your last tax bill towards your next year’s liability. This may come as a bit of a surprise in the first year, but it is important that you budget for it.
How to File a Tax Return When You Are Self-Employed
If you are getting ready to file your first tax return as a self-employed person, it may seem daunting and overwhelming. However, if you are well prepared you should be well on your way. You will receive a notice to file each year, and you can file your return at any point from then. There is really no necessity to leave it until the last minute. Most people will file their Self-Assessment tax return online. For this, you will need to have Government Gateways login. Remember that this will take several days in the post, do if you want to do it this way, allow a few days or even a few weeks to be sure.
When you log in to your file, you will need to answer a number of questions about the nature of your business, any other income that you have received (this includes foreign), and your expenses and income. You can choose to write expenses as a single figure, or if your accounts are more complicated, you should be able to break them down.
