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Self employed Tax and NI (National Insurance)

When you are self employed you need to approach your tax return differently to a normal 9-5 employee. This article looks at your employment status, how to setup your tax affairs as a self employed worker and the requirements for remaining HR+MRC compliant when filing your tax returns when self employed.

Working out your employment status

In order to work out how much tax and National Insurance you should pay, first you need to work out you’re employment status which will be either employed or self-employed.

This is generally straightforward, but can be a little bit more complex. The complications arise if say you are employed in one job and at the same time self-employed in a different job.

The HM Revenue & Customs (HMRC) website uses a tool called the Employment Status Indicator that will work out your employment status for you based on your answers to a series of questions.

The good news is it’s completely anonymous and won’t ask for your name or any other personal details.

Register with HMRC as self-employed

As soon as you become self employed you must inform HMRC of you employment staus.

The very latest you can register with HMRC is by 5 October after the end of the tax year for which you need to file a tax return.

The tax year runs from 6 April one year to 5 April the next. If you register too late you might be liable to penalties.

How much tax and National Insurance do I pay as self-employed?

If you’re self-employed, you will probably need to pay National Insurance contributions (NICs) as well as income tax.

This currently includes Class 2 NICs (a flat rate charge on the self employed) and Class 4 NICs (contributions based on profits made).

NI overview

You pay National Insurance contributions to qualify for certain benefits and the State Pension.

You pay National Insurance if you’re 16 or over and either:

  • An employee earning above £162 a week
  • Self-employed and making a profit of £6,205 or more a year

You need a National Insurance Number before you can start paying National Insurance contributions.

If you earn between £116 and £162 a week, your contributions are treated as having been paid to protect your National Insurance record.

Your National Insurance number

You have a National Insurance number to make sure your National Insurance contributions and tax are recorded against your name only.

It’s made up of letters and numbers and never changes.

Who uses your National Insurance number

These organisations need to know what your number is:

  • HM Revenue and Customs (HMRC)
  • Your employer
  • The Department for Work and Pensions (which includes Jobcentre Plus and the Pension, Disability and Carers Service), if you claim state benefits, or in Northern Ireland the Department for Social Development
  • Your local council, if you claim Housing Benefit, or the Northern Ireland Housing Executive
  • Electoral Registration Officers (to check your identity when you register to vote)
  • The Student Loan Company, if you apply for a student loan
  • Your pension provider if you have a personal or stakeholder pension
  • Your Individual Savings Account (ISA) provider, if you open anISA
  • Authorised financial service providers who help you buy and sell investments like shares, bonds and derivatives

National Insurance classes

There are different types of National Insurance (known as ‘classes’). The type you pay depends on your employment status and how much you earn, and whether you have any gaps in your National Insurance record.

National Insurance Classes

National Insurance class

Who pays

Class 1

Employees earning more than £162 a week and under State Pension age - they’re automatically deducted by your employer

Class 1A or 1B

Employers pay these directly on their employee’s expenses or benefits

Class 2

Self-employed people - you do not have to pay if you earn less than £6,205 a year (but you can choose to pay voluntary contributions)

Class 3

Voluntary contributions - you can pay them to fill or avoid gaps in your National Insurance record

Class 4

Self-employed people earning profits over £8,424 a year

When you stop paying

If you’re employed, you stop paying Class 1 National Insurance when you reach the State Pension age.

If you’re self-employed you stop paying:

  • Class 2 National Insurance when you reach State Pension age
  • Class 4 National Insurance from 6 April (start of the tax year) after you reach State Pension age

Plans to abolish Class 2 NICs contributions have been delayed by the government until April 2019.

Do you need to register for VAT?

Some self-employed people also need to register for VAT. Others might benefit from registering voluntarily. See the article Registering for VAT.

Keeping good records

You will see this theme running through most of the related articles but in order to work your tax out correctly you’ll need good records of the money that comes into and goes out of your business.

It will be much easier to fill in your tax return if you keep good records as you go along rather than trying to find all your invoices and receipts at the end of the year.

You can be fined for failing to keep records.

Your basic records must include:

  • All your sales and takings
  • All your purchases and expenses

To work these out you should keep any paperwork or electronic documents relevant to your business, including:

  • Cashbooks
  • Invoices
  • Mileage records
  • Bank statements
  • Receipts for purchases
  • Your P60s if you are also employed

A good way of keeping the records up to date and in one lace is by using a recommended self assesment software provider that gives you the option to upload your records throughout the year.