When it comes to paying Income Tax, you don’t just pay it once – you pay it twice. This is because you are both a trader and a taxpayer. As a trader, you make profits and losses from buying and selling shares and securities. These gains and losses are called ‘trading profits’. Trading profits are taxable.
As a taxpayer, you pay Income Tax on every penny of your net income. Net income includes your trading profits plus any interest and dividend payments. But there’s a limit on what can be deducted against your income. This limit is known as the annual allowance (£10,800). If you exceed your annual allowance, you must pay tax on anything over and above the allowance.
Income Tax is charged at different rates based on your personal circumstances. For example, traders earning less than £50,000 per annum pay no tax. However, those earning over £50,000 pay either 20% or 40%. In addition, traders who earn over £100,000 pay a further 40% on any earnings exceeding £150,000.
The rules governing self-employed income tax are complex. To help you understand how your taxes work, we’ve put together this guide.
What is self-employed income tax?
Self-employed income tax is charged based on your net profit. You are taxed on what you make over and above your costs, such as rent, utilities, insurance, etc. This is called the “net profit.” If you don’t pay taxes on your net profit, you’ll owe additional money.
Business expenses and capital allowances will deduct some of your expenses from your taxable income. These deductions include depreciation, interest, advertising, travel, supplies, office rental, repairs, etc.
Losses carry forward from year-to-year if you want to offset profits against losses. For example, if you had $1,000 in sales during one year and lost $500 on it, you’d still report $500 in profits for that year. In the next year, you could use those $500 in losses to offset future profits.
How do I go about paying my taxes if I am self-employed?
Income tax is something you need to consider whether you are employed or self-employed. If you are working for someone else, it might seem like a no brainer – you need to pay taxes to the government. However, there is a difference between being employed and self-employed.
What are the steps involved in submitting a tax return if you are self-employed?
If you are self-employed, you don’t need to complete an annual income tax return. You simply need to pay any outstanding tax due. This includes Class 2 National Insurance contributions (NI), which apply to those earning over £83,000 per annum. If you earn less than this amount, there is no need to pay Class 2 NI. However, if you want to claim any expenses incurred while carrying out your trade or profession, you must include them in your tax return.
You can find out how much you owe by looking up your UTR number online. This is a unique reference number that allows HM Revenue & Customs (HMRC) to identify your tax returns. Once you’ve found it, enter it into the relevant section of your tax return.
Which self-employment supplement should I choose?
The Self-Employment Income Supplement (SEIS), the Self-Employed Persons Grant (SEPG) and the Tax Credit for Small Businesses Scheme (TCSB) all offer different benefits. Which one is best for you depends on how much money you earn each year. If you’re earning less than £85,000, you’ll qualify for the SEIS. If you make over £85,000, the TCSB is better for you. And if you earn between £85,001 and £150,000, the SEPG is probably the most suitable option.
If you want to find out what you qualify for, use our calculator.
What if I was awarded a grant for self-employed income support (SEISS)?
If you’ve ever received a SEISS grant, you might find yourself wondering what it actually means. You may have heard about it, but don’t know how it works. And even if you do, there could still be some confusion over whether you’re required to report the money as income. So we asked our experts – including one of the UK’s leading accountants – to give us the lowdown on how you should treat this income.
This is the basic grant that anyone receiving it is entitled to claim. Grant 1 doesn’t require you to show a profit or losses from your business activities. However, you must keep records of your expenses and revenues for each activity you carry out under your business trading name. This includes any costs associated with running your business such as rent, rates, insurance and utilities.
The second grant requires you to show profits or losses from your business. Grant 2 is paid monthly and covers up to £2,500 per month. It is paid in addition to the basic grant, meaning you receive both types of payments. Your grant is based on your net profit or loss from your business activities. To qualify, you must earn less than £10,000 in gross profit from your trading activities during the relevant period.
This is the third and final grant. Grant 3 is paid quarterly and covers up to £5,000 per quarter. It is paid in excess of the basic grant, meaning it pays for additional expenses incurred above those covered by the basic grant. As well as covering your actual expenses, the amount of grant 3 you receive depends on your total earnings from your business.
What if I am a lone proprietor with a corporation or partnership?
The answer might surprise you.
In fact, it could save you money – and help protect your personal assets.
If you’re a self-employed person or part of a small business, you may benefit from being registered as a Limited Liability Company (LLC), Limited Partnerships (LP) or Sole Trader (ST).
But what are the differences between each type of entity? And how do they affect your tax affairs?
We’ve put together some handy information about LLCs, LPs and STs, including:
• What they are, and why they’re useful for different types of businesses
• How they work, and what happens when things go wrong
What are the tax rates for self-employed income for 2022-23?
The government introduced legislation earlier this week to change the way self-employed people calculate their tax liability. This includes changing how much you’re taxed on earnings up to £50,000 ($64,890).
But don’t worry – there’s no difference in income taxes between selfemployed people and employed people.
There are three types of income tax: basic rate, additional rate and higher rate.
Basic rate income tax starts at 22% and rises to 45%. Additional rate income tax starts at 40% and goes up to 50%. Higher rate income tax starts at 45% and tops out at 48%.
Self-employed people pay the same amount of tax as employees. They just use different rules to work it out.
If you earn less than £10,600 ($13,500), you won’t owe any tax. If you earn more than £11,850 ($15,100), you’ll pay 10% on everything over £7,425 ($9,350). And if you earn more than £12,700 ($16,200), you’ll pay 30% on anything above £9,525 ($12,050).
You still pay national insurance contributions (NICs) regardless of whether you’re self-employed or employed. NICs start at 2%, go up to 5% and increase every year.
National Insurance for the self-employed
In 202021, you pay National Insurance contributions if you:
Earn over £11,938 per annum (£11,908 if you’re single).
Make more than £6,563 per annum (£6,531 if you’re single). This includes earnings above £13,865 for married couples.
There’s a difference between Class I and Class IV contributions. Class I contributions are paid at 0·75% and Class IV contributions are paid at 3·25%.
Class II contributions are paid at 5% of income up to £10,788; 10% of income above £10,788 up to £20,968; 15% of income above £20,968 up to £40,184; 20% of income above £40,184 up to £60,368; 25% of income above £60,368 up to £80,584; 30% of income above £80,584 up to £100,880; 35% of income above £100,880 up to £120,960; 40% of income above £120,960 up to £140,952; 45% of income above £140,952 up to £160,944; 50% of income above £160,944 up to £180,916; 55% of income above £180,916 up to £200,800; 60% of income above £200,800 up to £220,760; 65% of income above £220,760 up to £240,720; 70% of income above £240,720 up to £260,680; 75% of income above £260,680 up to £280,620; 80% of income above £280,620 up to £300,580; 85% of income above £300,580 up to £320,520;
Submit your tax return for 2021-22 with Which?
The deadline to submit your 2021-22 tax returns is fast approaching. If you haven’t already done so, now is the perfect time to start preparing your taxes. To make it easier for taxpayers to do so, HMRC launched Which? Tax Online – a digital version of the popular Which? magazine.
Which? Tax Online allows people to quickly and easily complete their tax return online, saving them money and time. This includes filing their self assessment tax return, paying their income tax bill and submitting their National Insurance contributions.
Frequently Asked Questions
Who determines how much tax I owe?
If you are submitting a paper tax return, HM Revenue & Customs (HMRC) will calculate your tax and send you a tax return, known as a form S102. This is usually done within 10 working days of receiving your tax return.
You must complete the tax return, sign it and post it to HMRC.
If you are sending a paper tax return after 30th November 2018, you cannot claim interest on the late payment of tax.
If you are submitting an e-tax return, HMRC will calculate your tax automatically and show you the total tax due. You can view the calculation online, print it out or download it as a PDF.
You may already have had tax taken off some income, for example, you are registered under the CIS scheme or you are employed and are self-employed. In this case, you include all the income you report on the tax return, even if it has already been taxed.
However, you do not include any tax that has been deducted on account.
What are the consequences of paying my taxes late?
If you are paying your taxes late, you must make arrangements with HM Revenue & Customs (HMRC) to repay the amount owed within 28 days of being notified by HMRC. If you do not agree a repayment plan, you could face penalties.
You may also be liable to interest charges on the outstanding balance from the date the payment became overdue until it is repaid.
Penalties for failure to file include:
• A fine of £100 per day up to a maximum of £10,000.
• An additional 25% of the unpaid tax plus interest from the date the tax was due until the date the money is repaid.
• Interest charge on the unpaid tax from the date the tax became due until the date the tax is repaid.
There is no limit on how much interest can be added. This includes interest accrued from previous periods where the tax was not paid. For example, if you owe £1,000 of income tax and fail to pay it by the end of October, you will be charged interest on the full amount of tax from the start of November.