Being self-employed and what this means for tax

If you start working for yourself, you may be classed as a sole trader. This means you’re self-employed, even if you haven’t yet told HMRC. So what does this mean for tax? 

Are you self-employed?

You may assume you are self employed, but HMRC could deem you to be employed even if you have a different status in employment law.  You will typically be self employed if the following apply to you:

  • You run your business for yourself and are responsible for success and failure
  • You decide how, when, where you work and who you work for
  • You provide the main items to allow you do the work
  • You charge an agreed price for work
  • You sell goods or services to make a profit (this includes online and app based selling). This includes:
    • Selling regularly for a profit
    • Making items to see for a profit
    • Commission-based selling

The main difference would be that, if HMRC deem you to be ‘contracted’, they will demand tax and National Insurance to be paid as you would have done as an employee.  This is a very complex area and an area where HMRC regularly raise queries as it depends on each person’s specific role and facts.  You may have seen that HMRC recently had some high profile successes against television presenters who believed they were self-employed.  We are very happy to discuss this with you if you are concerned about your self-employed status.

Please see our blog on off-payroll working for more details.

What do you need to do if you are self-employed?

You will need to register with HMRC for self-assessment. This should be done by 5 October following the end of the tax year your trade starts in.  MHA Tait Walker can assist you with this.

If your business turnover is over £85,000, you will also need to register for VAT.

As a sole trader, you have certain responsibilities for managing your records and taxes as follows:

1. Keep records of your business’ sales and expense

You will need to keep records of any:

  • Sales and income
  • Business expenses and receipts
  • VAT and PAYE records (if applicable)
  • Records of your own personal income i.e. employment or savings income

For example, the types of proof that are satisfactory records are:

  • All receipts for purchases
  • Bank statements
  • Sales invoices

You must keep your records for at least five years after the 31 January submission deadline of the relevant tax year.  Therefore, for a sole trade in 2019/20, you will need to keep records up to 31 January 2026.

2. Send a tax return every year

Paper tax returns must be submitted by 31 October following the end of the tax year. Online tax returns must be submitted by 31 January following the end of the tax year.

3. Pay Income Tax on your profits and Class 2 and Class 4 National Insurance (if applicable)

Any amounts owing must be paid by 31 January following the end of the tax year. In some cases an interim payment on account will also be due towards the following year tax liability. This is discussed in more detail below.

Calculating your profits

To calculate your profits, you need to look at the income you received less any allowable expenses for tax.  Allowable running costs and expenses would typically include:

  • Office costs
  • Travel costs
  • Some clothing and uniform expenses
  • Staff costs
  • Things you buy to sell on, for example stock or raw materials
  • Financial costs e.g. bank charges
  • Costs of your business premise
  • Advertising or marketing

You cannot claim expenses if you use your £1,000 tax-free ‘trading allowance’ as detailed below.

Trading Allowance

Each year a sole trader can receive £1,000 per tax year in a tax-free allowance for trading income.

If your trading income is more than £1,000 then you can use the tax-free allowance, instead of deducting any expenses, but cannot deduct any expenses to reduce the profit further. Therefore, if you have high expenses it may be beneficial to not claim the trading allowance.

Losses

If your expenses exceed your income, you will make a loss in the year and can carry this forward to be offset against future profits of the trade.  If you have other taxable income or gains in the tax year, you may choose to offset the loss made against the income and gains to reduce your tax liability.

Calculating and paying your Income Tax

Once you have calculated the taxable profit in the year you will need to make your Income Tax payment by 31 January following the end of the tax year i.e. by 31 January 2021 for a profit made in 2019/20.

In some cases, if your tax liability is above £1,000, you will also need to make interim payments on account towards the following year tax payments. The payments are due by 31 January and 31 July following the end of the tax year i.e. 31 January 2021 and 31 July 2021 for 2020/21.

Income tax rates for the UK are:

Rate bandIncomeTax rate
Personal AllowanceUp to £12,5000%
Basic rate band£12,501 to £50,00020%
Higher rate band£50,001 to £150,00040%
Additional rate band£150,001+45%

Income rates for Scotland are:

Rate bandIncomeTax rate
Personal AllowanceUp to £12,5000%
Starter rate£12,501 to £14,54919%
Basic rate£14,550 to £24,94420%
Intermediate rate£24,945 – £43, 43021%

The Personal Allowance is the amount of income you can earn before you start paying tax.  However, if your income is over the threshold of £100,000, then the allowance is reduced.  If you would like further information on this please get in touch.

National insurance

You usually pay two types of National Insurance if you’re self-employed:

  • Class 2 if your profits are £6,365 or more a year payable at £3 per week
  • Class 4 if your profits are £8,632 or more a year at 9% on profits between £8,632 and £50,000 and 2% on profits over £50,000

Other

As a sole trader you may want to consider professional indemnity insurances to protect you as well as income protection insurance to cover any loss of earnings if you are ever incapable of working.

How we can help

This article is a brief overview of what to consider and what records to keep if you are self-employed and we would recommend professional advice if you are self-employed.

We have a large tax team at MHA Tait Walker who can help you understand your self-employed tax status and calculate your profits as well as prepare and file your tax return on your behalf.  Please contact us for more information on 0191 285 0321 or email advice@taitwalker.co.uk.