What the self-employed need to know about paying tax in 2022
When it comes to all things tax, things can feel like a bit of a mystery. This, however, is one of the major benefits of working for a business; most of this is taken care of. You turn up to work, and when payday rolls around, your tax and national insurance have been organised by your employer.
If only things were this straightforward for the self-employed. If you are self-employed, then the responsibility of paying your taxes falls on you. So, to help you understand how taxes work for the self-employed, follow this guide!
- How to register as self-employed
- What tax do I have to pay? What about tax breaks?
- Paying National Insurance
- Corporation Tax
How to register as self-employed
Once you make the decision to take the leap into self-employment, you need to determine the status of your employment. This is typically a simple process, and if you’re uncertain what your employment status is, you can use this online tool. Keep in mind that is only an indicator, and is not to be viewed as definitive in regard to your employment status.
Once you’ve established that you fall under the bracket of self-employed, you need to notify HMRC as soon as possible. There is a cut-off date for registration that works within the tax year, which is the 5th of October of the tax year that you became self-employed. If you miss this cut-off date, you may be charged a penalty fee. The tax year is from 6th April till the 5th April in the following year.
You can register as self-employed via the HRMC website here. Once you have completed this process, you will be referred to as a sole trader.
What tax do I have to pay? What about tax breaks?
The amount of tax that you have to pay will depend on several factors, but for the most part, it is similar to how a regularly employed person is taxed. The tax-free threshold is £12,500, no matter your employment status.
Once you move past this threshold, you are required to pay the basic rate of income tax. This will be 20% of your earnings between £12,000-50,000, minus allowable expenses. Once you earn between 50,000 and 150,000, a rate of 40% is applied. The highest bracket is for those earning over 150,000, is taxed at a rate of 45%
However, as a sole trader, there are certain allowable expenses that you can claim against your tax. These are essential business expenses and must fall within HRMC guidelines. These expenses are deducted from your earnings to determine the amount of income that can be taxed.
For example, if you earned £30,000 and had £6,000 in allowed expenses, your taxable income would be £24,000.
Paying national insurance
As a self-employed person or sole trader, you still need to make National Insurance contributions. This goes towards universal credit and pension schemes. NI rates are calculated based on your profits. You must earn more than £6,515 to start making NI payments.
If you fall within this bracket, you need to pay £3.05 a week, or a total of £158.60 per year.
If you earn between £8,164 and £45,000, your NI contributions will be 9% of these profits. Any profits over £45,000 will be taxed at 2%.
You can pay the National Insurance that you owe when you complete your self-assessment tax return. Alternatively, you can make voluntary contributions via the governments National Insurance checker.
Self-employed people, sole traders, and certain partnerships are not subject to corporation tax. A businesses that falls under this bracket is regarded as self-employed, and any profits will be taxed once they have been submitted in an annual self-assessment through HRMC.
Getting business insurance is worthwhile for a number of reasons. For starters, it is considered an allowable expense and can be deducted from your taxable profits when completing your self-assessment.
Secondly, it ensures that you, your clients, and your business, is protected in case of the worst. Having the right insurance will allow you to operate and continue down the road of self-employment with confidence.
Two essential types of insurance for self-employed people are:
When you’re self-employed, your entire business may be built on a few possessions, such as your computer, phone, and a printer. In the event that these are damaged and stolen, you may be left unable to work for a period of time and at risk of losing clients and profits. Contents insurance, however, can help to protect you and your business by replacing these valuable items so you don’t have to go out of pocket.
Protecting members of the public or visitors to your premises is essential. What would you do if a customer tripped over your laptop cable and pursued you for compensation? Of if you spilt a hot cup of coffee on a client? Could you afford to pay compensation out of your business account? With public liability insurance, insurers take care of everything for you and will deal with the claim, liaise with the customer and pay any compensation. This type of insurance is the lifeline of any business.
There you have it, your guide to getting started on the path to self-employment and managing your taxes in the process. Remember, working for yourself without the protection of the right insurance leaves you, your business, and your clients vulnerable to unnecessary risk.