A guide to self-employed National Insurance and other tax issues

Published · 8 min read

Self-employed National Insurance is one of the key tax considerations you need to be aware of when you work for yourself. If you’re looking for advice on self-employment, this article will help you. It covers how to register as self-employed with HMRC, what you need to know about pensions, tips on dealing with taxes, and much more.

Introduction to self-employed National Insurance

Be your own boss. Work when you want to. Earn money for yourself rather than the organisation. With self-employment the highs are higher and the lows lower.

Whatever the appeal, more of us are becoming self-employed. According to government figures the number of people who are self-employed rose from 3.3 million or 12% of the labour force in 2001 to 4.8 million or 15.1% in 2017.

As more and more people opt to become self-employed rather than working for someone else there’s a growing interest in the tax requirement of self-employment and questions about issues such as self-employed National Insurance.

Some people who have made a living for years working for themselves have suddenly been landed with huge tax demands that have wiped out their savings.

Being employed and self-employed? It is possible
Being employed and self-employed? It is possible

Can I be employed and self-employed?

So, what do you need to know to ensure that your tax arrangements and finances are in order when you set off on the road to self-employment? One of the first questions many people have is whether they can be both employed and self-employed.

The simplest form of self-employment is to become a sole trader. Here, you’re not employed as you only work for yourself, keeping all the profits.

On the other hand, you’re personally liable for any debts that you incur. To become a sole trader, you’ll need to register with HMRC within three months of the month in which you started your self-employment.

On the other hand, you could set up your own limited company. You’ll have to register it with Companies House. In this case, you will technically be employed by it and so, in practice, you’ll be both employed and self-employed.

You’ll need to fill in a tax return with details of all of your income – including the money you earn from your regular employment, plus any benefits or expenses you receive.

How do I register as self-employed with HMRC?

You need to set yourself up as self-employed if you earned more than £1,000 from self-employment between 6 April 2017 and 5 April 2018 or if you want to make voluntary Class 2 National Insurance contributions (NIC) to help you qualify for benefits. You’ll need to register by 5 October in your business’s second tax year and send a tax return.

Start by checking that your work is considered to be self-employment with the government’s Employment Status Indicator.

If it does you’ll need to create a Government Gateway account and then complete the registration form. You’ll then have to keep accurate, up-to-date records of your income and expenditure.

This will allow the HMRC to assess you accurately for taxes such as VAT (if your business earns enough to go over the VAT threshold, currently £85,000) and self-employed National Insurance.

You must file your Self Assessment tax return by 31 January every year. You’ll also have to make payments to HMRC on 31 January and 31 July.

Knowing how much tax to pay is important
Knowing how much tax to pay is important

How much tax do I pay if I’m self-employed?

The amount of tax you pay if you’re self-employed depends, of course, on your profits. Broadly speaking, either you or your accountant will submit your tax return to HMRC and you’ll pay tax on the profits, minus deductible expenses.

These depend on the nature of your work. Your accountant will also be able to help with issues such as self-employed National Insurance.

You’ll then pay the same amount of tax as someone who’s employed. You’ll also have to make National Insurance contributions (NIC). Again, these will depend on how much you’re earning.

If you’re over the VAT threshold of £85,000, you’ll have to pay VAT. However, in some cases companies that have a smaller turnover can apply to use the flat rate scheme for small businesses.

Designed especially for those businesses that have little expenditure on goods and raw materials, this scheme simplifies the VAT process.

Step Change, a debt charity, has a useful calculator to help you work out how much income tax and self-employed National Insurance you’ll probably have to pay.

HMRC has something similar. Currently, income tax stands at the basic rate of 20% for those earning between £11,501 and £45,000, while those on £45,001 to £150,000 pay the higher rate of 40%. There is an additional rate of 45% for earnings above £150,001.

How does National Insurance work if I’m self-employed?

Self-employed National Insurance, as is the case with all NIC, helps to pay for some state benefits including retirement pensions.

If you are self-employed and you’re not yet at the state retirement age, you will have to pay two types of NIC – Class 2 and Class 4. When you register with HMRC as self-employed, you’re covered for both income tax and National Insurance.

With Class 2 NIC you pay the same every week, £2.95 for 2018/19, assuming your profits are above the small profits threshold. At the moment, this figure is £6,205 or more a year.

The amount of Class 2 NIC you’ll need to pay is based on the number of weeks of self-employment in the tax year. So, if your self-employment began on 1 February 2019, for instance, you would pay nine weeks’ Class 2 NIC at £2.95, that is £26.55.

You pay Class 4 NIC on your taxable self-employed profits. The rates you pay depend on thresholds and limits set each year by HMRC and your earnings.

Currently, for instance, if your profit is less than £8,424 for the tax year 2018/19, you don’t pay any Class 4 NIC. If you make between £8,424 and £46,350 you’ll pay 9% on your profits and with any profits above £46,350, you pay 2%.

For most people, Class 4 NIC are due on 31 January following the end of the tax year to which they relate, while Class 2 NIC are paid as part of the payment due on 31 January following the end of that tax year.

If you make payments on account – in other words, an advance payment on your taxes to HMRC – your Class 4 NIC will also be paid with this instalment.

Working from home? You can claim a proportion of costs, such as light, heat and mortgage interest
Working from home? You can claim a proportion of costs, such as light, heat and mortgage interest

How to minimise your taxes if you’re self-employed

There are various ways to minimise your tax liability if you’re self-employed and to reduce your self-employed National Insurance. As ever with tax, it’s essential to get advice from a qualified person and not to be too cheeky. Pushing your luck with HMRC could result in an investigation, which is costly and time consuming for any business, whatever its size.

However, depending on the nature of your business, you can usually claim expenses such as travel including train and plane tickets, taxi fares, hotel accommodation and certain costs related to your car.

These include vehicle insurance, repairs and servicing, fuel, parking, hire charges, vehicle licence fees and breakdown cover.

Instead of calculating the actual costs, you might be able to determine your vehicle expenses using the flat rate, also known as simplified expenses.

More generally, also relevant are expenditures such as stationery, hospitality and computer software. If you work from home you can claim a proportion of costs, such as light, heat, mortgage interest, insurance, council tax, water rates, general wear and tear, and even cleaning.

If you pay tax at the higher rate of 40% and you’re self-employed, you can get tax relief by topping up your pension. You must declare these contributions on your Self-Assessment tax form.

You can also usually claim capital allowances if you buy equipment, machinery or business vehicles that are necessary for your work.

If you’re a sole trader, it might be worth becoming a company as this could save self-employed people with an annual income of £30,000 a year up to £700 a year, according to the Office for Budget Responsibility. Dividends from your company are free from tax altogether for the first £2,000.

If you make personal pension contributions, you will usually get 20% tax relief. This is added to your contributions by the UK government.

You will also get income tax relief with your personal tax return if your earnings are above the basic tax band. It’s important to get advice here from a professional adviser.

Donations to charities can be offset against tax and with Gift Aid if you’re a higher rate taxpayer. You can reclaim the rest of the tax that you have paid on your donation by including details in the self-assessment tax return.

Benefits available to the self-employed

Many of the self-employed like those working for other people can claim tax credits. Working tax credits top up your income – and so they can be useful if you are just getting your business off the ground. In addition, child tax credits can be used to top up income for those who are responsible for at least one child or young person.

If you’re self-employed and you’re registered with HMRC, you’re paying Class 2 NIC or you have a Small Earning Exception for a least 26 of the 66 weeks up to and including the week before you expect to give birth you can also claim Maternity Allowance (MA).

Don't forget about pensions if you're self-employed
Don’t forget about pensions if you’re self-employed

Pensions for the self-employed

Almost all of us need to save more into our pensions – and this applies to the self-employed as well as those who work for companies and are now usually subject to auto-enrolment.

If you’re working for yourself, putting money aside for your retirement can require more discipline as there’s no one else to remind you to do it.

Although thanks to your self-employed National Insurance payments, you’ll still be paying into have the state pension, so it’s worth thinking about additional pension options.

A personal pension is the most popular choice. Your provider will offer you a range of funds in which to invest your contributions. As mentioned above, you’ll also receive tax relief.

As is the case with employed people, if you’re self-employed you’ve got a choice of four different types of pension.

First is the ordinary personal pension. Then there are stakeholder pensions. Here the maximum charge is no higher than 1.5% and you can stop and start paying in without being subject to a penalty.

The third option is the self-invested personal pension or SIPP. These have a wider range of investment options but charges are usually higher.

Finally, the self-employed can also use NEST (National Employment Savings Trust). This is the workplace pension scheme set up by the government for auto-enrolment.

Since in effect it’s a trust run by the NEST Corporation, it has no shareholders or owners and so it’s run for the benefit of its members. It’s worth making payments to your pension alongside your self-employed National Insurance.

More financial tips for the self-employed and final thoughts

Becoming self-employed can appear daunting but the good news is that there’s plenty of advice available, much of it free.

The Money Advice Service, an independent body with responsibility for improving people’s money management, offers plenty of information about the law, tax, self-employed National Insurance, benefits and allowances for those who are working for themselves. The government’s own site has more help and advice.

If you’re not great with money or you’d rather spend more time and effort on developing your business than doing detailed spreadsheets of your income and expenditure, it might be worthwhile paying a bookkeeper. The Institute of Certified Bookkeepers is a good place to start your search for one.

If for whatever reason you’ve decided to stop being self-employed then you must tell the HMRC. Your Class 2 NIC will be cancelled and you’ll need to send your final tax return.

You’ll also be required to work out your trading income and add up your allowable expenses. In addition, it’s important to calculate your capital allowances and decide if you need to pay Capital Gains Tax on any equipment that you’ve sold. Finally, you’ll need to add up your final profit or loss.

On the other hand, if you’re just starting your self-employment journey, getting your tax affairs sorted out and ensuring that you’re paying the correct self-employed National Insurance can take time, effort and, if you’re getting professional help, money.

When you’re working every minute of the day to keep your order book full, to keep your customers happy and to attract more of them, sorting out your tax and financial arrangements can slip down your to-do list.

However, falling foul of HMRC or underpaying your tax can cost you dear in back payments, fines and additional accountants’ fees.

On the other hand, investing some time and money to make sure you’re compliant can also mean you’re getting all the benefits, allowances and other advantages that you’re entitled to as part of the growing army of the self-employed.

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