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Knowledge Base

Tax and National Insurance for people who are self-employed

01 December, 2008

If you are self-employed You are responsible for your own tax and National Insurance contributions. This means telling HM Revenue & Customs (HMRC) about your income by filling in a Self Assessment tax return. You must register as self-employed with HMRC within three months, or you could face paying a penalty.

You can download a registration form from HMRC website or you can register by phoning the Newly Self-employed helpline on 0845 915 4515 open 8.00am to 8.00pm Monday to Friday and 8.00am to 5.00pm Saturday and Sunday.

Depending on what type of National Insurance contributions you pay, you may lose the right to certain benefits, statutory payments, employment rights and the additional State Pension.

Tax for the self-employed

If you're self-employed, you are responsible for paying your own tax and National Insurance Contributions (NICs). You'll need to keep business records and details of your income so you can fill in an annual Self Assessment tax return. You may also need to register for VAT.

Register with HM Revenue & Customs (HMRC)

It's important to let HMRC know that you're self-employed as soon as possible - even if you already fill in a tax return each year. If you don't tell them within three months of the end of your first month in business you could face a penalty test. You can register by:

  • Calling the Newly Self-employed helpline on 0845 9154 515 open from 8.00 am to 8.00 pm Monday to Friday and from 8.00 am to 5.00 pm at weekends
  • Completing the form at the back of the leaflet: 'Thinking of working for yourself?'

Income Tax and Self Assessment

Once you're registered as self-employed, you'll be a Self Assessment taxpayer. You'll have to fill in a tax return each year and give details of your earnings and any other income you get. This information is used to work out how much tax you have to pay.

National Insurance Contributions (NICs) Class 2 NICs

Class 2 NICs count towards certain benefits, like State Pension, Maternity Leave and Bereavement Benefit.

You pay Class 2 NICs at a flat rate of £2.30 a week (2008-2009) if your earnings are above £4,825 per year. You can choose to make your payments either quarterly or by monthly direct debit.

Bear in mind that Class 2 NICs don't count towards the additional State Pension, Statutory Sick Pay or Jobseeker's Allowance, so you might want to think about making other arrangements like a personal pension and income protection insurance. You can register for Class 2 NICs when you register as self-employed.

Exceptions to paying Class 2 NICs

If you earn less than £4,825 per year you can apply for a certificate of small earnings exception and not pay Class 2 NICs. However, you might decide to carry on paying them voluntarily to keep your entitlement to the State Pension and other benefits.

Class 4 NICs

The amount of Class 4 NICs you have to pay for any tax year is based on your profits for that year. You pay eight per cent on annual profits between £5,435 and £40,040 and one per cent on any profit over that amount.

You work out your Class 4 NICs on your tax return and pay them alongside your Income Tax. Class 4 NICs don't count towards benefit entitlements.

Value Added Tax (VAT)

If your business turnover is more than the VAT threshold (£67,000 from 1 April 2008) you will normally have to register for VAT. Even if your turnover's below the threshold it might benefit your business to register voluntarily.

If you have an accountant they will be able to advise you or you can ring HMRC's National Advice Service Enquiry Line on 0845 0109 000 open from 8.00 am to 8.00 pm Monday to Friday.

Record keeping

Legally you have to keep records for your business and for any other income you get. This is so you can fill in your tax return and show that the figures are right. You'll need to keep at least:

  • Invoices for sales and purchases
  • Receipts for business expenses
  • Bank records

Good records will also save you time and help you run your business more efficiently.

Limited Company accounting fees for only £148 per month. We do your paperwork, you focus on running your business. Find out more, or contact us today.