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A guide to taxes for self-employed professionals

Kira O'Sullivan
23 September 2020
7 minute read

Ask any self-employed professional what their favourite thing about being self-employed is and you’ll likely hear answers like ‘flexibility’ and ‘freedom’. What you certainly won’t hear is dealing with ‘taxes’ (or insurance, we admit) - and for good reason! While taxes for employees are looked after by the employer, being self-employed comes with the burden of filing and being totally accountable for your own taxes.

Tax isn’t our domain, so we’ve engaged the assistance of our wonderful partner, TaxScouts to help us with this guide. As the name suggests, they’re experts when it comes to tax.

In fact, their purpose is to simplify the tax preparation process for the 200 million Europeans who go through it every year. They do this through their app, which helps you sort your Self Assessment through a certified accountant, all for a flat fee.

Making your tax return easier with TaxScouts

We’ve partnered with TaxScouts to give you 10% off their personal tax return service, which normally costs £119.

Taxes for self-employed professionals

Can I pay tax monthly if self-employed?

No. While pay-as-you-earn tax (PAYE) means that employees’ taxes are paid on a monthly basis, if you’re self-employed, you’ll have to pay your tax on an annual basis. However, there’s a slight caveat to this. If the flexibility of being self-employed works for you, but paying income tax on an annual basis doesn’t, working under an umbrella company is something you may like to explore.

An umbrella company is a type of limited company that is set up to act as an employer for self-employed professionals. It provides a payroll service, which means that income tax is paid annually for any work performed through the umbrella company and some even offer benefits. This can simplify things, but remember that you most likely will still need to file a return (it’ll just be simpler, hopefully!)

What key dates do I need to remember?

Fortunately there aren’t many dates to remember when it comes to your taxes. The key ones to think about are as follows:

  1. The tax year runs from 6 April to the 5 April the following year. This means that you have approximately nine months each year to prepare your return for the previous year, if submitting it online - and six if submitting it by paper.
  2. If you haven’t already done so, 5 October is the deadline to register as self-employed
  3. 31 October 2020 is the deadline for submitting paper returns and 31 January 2021 is the deadline for online returns
  4. Pay the tax you owe: midnight, 31 January 2021.

How much tax do I need to pay?

Tax may seem complex, but it’s one of those things that you need to spend time getting to grips with and once you’ve done that, you’ll be able to tackle your taxes year after year with far less stress.

In the next three sections, we’ll explain the basics when it comes to business expenses, how to take care of your income tax, and National Insurance.

Expenses

Before considering income tax or anything else, it’s a good idea to get your expenses sorted first, as many expenses are deductible from your gross income before calculating your final tax bill.

What constitutes a ‘business expense’?

An easy rule-of-thumb is to ask yourself: is the expense directly connected to the running of my business? Examples of common business expenses include:

  • Business travel costs - including fuel and parking
  • Staff costs (e.g. salaries, freelancers)
  • Business equipment costs (e.g. laptops)
  • Utilities (e.g. electricity, internet, gas and water)

If you’re operating as a sole trader or a partnership (not involving a limited company) you can opt for ‘Simplified expenses’, which enables you to calculate some business costs based on flat rates rather than your exact costs.

Income tax

If you’re self-employed, operating as a sole trader or a partnership, the amount of tax-free income and income tax brackets are exactly the same as if you were an employee. However, they are calculated based on 'profit', which means that you calculate your tax amount after deducting business expenses and capital allowances.

For the 2019/2020 tax year, these rates are:

  • No tax on the first £12,500 income
  • 20% tax on anything you earn between £12,500 and £50,000
  • 40% tax anything you earn over £50,000
  • 45% tax on anything you earn over £150,000

However, you’re operating as a limited company, it’s a little more complicated. Limited companies in the UK don’t pay income tax or National Insurance. Instead, they pay Corporation Tax, which is currently set at 19% (due to decrease to 18% for the tax year beginning April 2020) and it is paid on profits.

National Insurance

If you're operating as a sole trader or a partnership*, you will also need to take care of your National Insurance contribution.

This is split into two categories, ‘Class 2’ and ‘Class 4’. Which class you sit in and therefore your National Insurance contribution is dependent on your profits.

Class Profits per year Rates for tax year 2020-2021
2 £6,475+ £3.05 a week
4 £9,501+ 9% on profits between £9,501 and £50,000 / 2% on profits over £50,000

*Certain self-employed professionals are exempt from National Insurance. These include:

  • Examiners, moderator, invigilators and exam content creators
  • Those who run businesses involving land and property
  • Religious ministers who do not receive payment for their services
  • Those who invest for themselves or on behalf of others (so long as they are not operating as a business and receiving payment)

TaxScouts has a great set of tax calculators, including one specifically designed for income tax which enables you to enter your income and expenses, and calculates your National Insurance and income tax.

What if I make a mistake on my tax return?

We all make mistakes - in fact, 2 million people made a mistake on their tax return in 2018. Fortunately, HMRC have made it possible to rectify these mistakes with relative easy.

How you deal with a mistake you made on your tax return depends on how you filed it and how late you’ve realised the mistake.

If the deadline was in the past 12 months

If you filed online

If you filed online, it should be case of logging into your HMRC self assessment account and going through the following steps:

  1. Select ‘more self assessment details’
  2. Select ‘at a glance’
  3. Select ‘tax return options’
  4. Choose the relevant return
  5. Update the return
  6. File it again

If you filed by paper

If, however, you filed by paper you’ll need to download a new tax return and send HMRC an updated version, marking each corrected page with ‘amendment’.

If the deadline was over a year ago

You’ll need to contact HMRC directly about your situation.

How are my tax payments affected by the coronavirus outbreak?

If you’ve participated in the Government’s Self-Employment Income Support Scheme, while you won’t need to pay back the money, it’s important to be aware that you will need to pay tax on it. Citizen’s Advice has a useful guide to this.

What records do I need to store for tax purposes?

Keeping records doesn’t necessarily mean file cabinets full of paper records, but it’s important to find a way of organising your records that works for you. We’ve put together a guide to keeping business records, which covers records for tax purposes and more.

Self-employed taxes

TaxScout’s top tax tips

Get it on a spreadsheet

The easiest way to keep on top of your finances is to keep everything you earn and spend in a spreadsheet for each tax year. Split it into monthly tabs and make sure you update it as you go. That way, when it comes to the actual tax return, all the information you’ll need will be in one place.

Use a business account

And speaking of keeping everything in one place, having a business account is a great way to split your sole trader income and spending from everything else. It’s easy to miss transactions when you’re having to pick them out individually from a statement of all of your finances, so make it easy for yourself. There are also lots of free business account apps to choose from now which you can set up in minutes.

Keep expenses in mind

A lot of sole traders aren’t sure exactly how expenses work. There’s a lot of grey area in terms of what can and can’t be expensed. Basically, if you spend something that is wholly, exclusively and necessarily for your business, you can deduct it from your income when you calculate the tax you owe. Find out how how expenses work.

Don’t forget about Payment on Account

This is something that’s easy to overlook. When you’re self-employed, your tax bill can be split into two instalments. But it’s not quite as you’d imagine.

When you first go self-employed, you pay 150% of your tax bill in one go - the tax you owe for the year you’ve worked and an advance payment for the months ahead. The second instalment is paid by 31st July. It can sound more complicated than is, so take a look at TaxScouts’ guide for clarity.

All your side gigs count

Although this is obvious, lots of us forget what counts as a side gig. Your self-employed income is not just contract work and client work. It can be anything from:

  • Being an influencer
  • Selling on eBay, Etsy, Depop, Facebook Marketplace
  • Working as a Deliveroo or Uber driver
    And more!

Getting insurance as a self-employed professional

Now you have an idea of how tax works for self-employed professionals, insurance will seem a breeze! Find out more about insurance implications in our simple guide to insurance for self-employed professionals.

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