Self-Employment Tax: 5 Things You Should Know

Being a self-employed individual comes with its perks, like working where from where you like, when you like, and doing what you love. It also comes with unique financial responsibilities, however, including paying wages, business expenses, and paying your own taxes.

When you are working for a corporation, big or small, your income tax obligations are usually fulfilled by your employer. While that's good news for employed individuals, self-employed individuals who also employ others have one more tax obligation to worry about.

These self-employment tax complications can be hard to navigate, which is why the following tips will come in handy.

Check if you are classified under the self-employed category

Since self employed tax rates and concessions are unique, you should first be sure that at least some portion of your income comes under this category. In the simplest terms, you can make use of the Check Employment Status for Tax (CEST) tool provided by the UK government to check whether you can be classified as self-employed for tax purposes. To ensure accurate results, be as detailed and precise as possible when inputting your details.

You can even use the tool in case there is a change in an existing contract you are a concerned party in or any of the information you provided earlier has experienced changes. Additionally, you can make use of the tool to check for yourself if the determination you were given by a third party was correct.

Check your tax obligations

Being a self-employed individual comes with the same tax obligations as your non-self-employed counterparts, with the addition of a self-employed income tax as well. But it also comes with a personal allowance – the amount you can claim tax free. The exact value of this personal allowance varies year on year.

For the 2019-20 tax year, the value for this personal allowance was £12,500 which remained the same for the 2020-21 tax year as well. For the 2021-22 tax year, however, the amount was increased to £12,570. However, you are not eligible for a personal allowance if your taxable income is greater than £125,140.

Additionally, the value of the self-employed income tax varies according to the tax rate applicable. The basic rate is 20%, which is applicable on the income bracket between £12,571 and £50,270. A higher rate of 40% is applicable for yearly income between £50,271 and £150,000. Higher still, an additional rate of 45% is applicable for all taxable income over £150,000.

Check how much of your business expenses are deductible

Some of the operating costs of your business can be deducted from your gross revenue to calculate your taxable profit. These do not include the money taken out of your profit to pay for personal or domestic expenses. Examples of allowable self-employed expenses include:

• Salaries or wages of office staff
• Travel costs
• Financial costs
• Marketing costs
• Business clothing expenses, etc.

You have two options to calculate your business expenses: simplified expenses or calculating your real-life business costs. Simplified expenses entail attributing flat rates to some of the most commonly incurred business expenses instead of carrying out detailed calculations. For instance, you can use the simplified expenses tool to calculate a flat rate and then multiply it with the business miles you drive throughout the year, the hours you work from home, or the number of people living on your business premises.

Detailed calculations for the rest of your expenses, or for the same expenses should you choose to do so, can be a feat of both precision and accuracy. For example, in order to claim deductible expenses for your car or van, you would have to keep all the receipts from fuel stations and have a reasonable estimate of the percentage of kilometers you drove for business purposes as opposed to those for your domestic errands.

Check your calculations

While HMRC is not responsible for reminding you of the deadline for filing your taxes or even telling you the amount you owe, it will hold you responsible for both not paying on time and not paying the correct amounts. Therefore, it is important not only that you stay on top of the timelines, but also that your self-employed income tax calculations are carried out with the highest accuracy. This is where outsourcing your bookkeeping and tax calculation to the experts at Lawrence Grant will pay off.

Check that you are paying taxes correctly

As opposed to non-self-employed individuals who pay their income tax liabilities via PAYE, self-employed individuals have to file separate Self-Assessment tax returns. As soon as your first income materialises, you have to register with HMRC as a sole trader or business owner. Registering late can incur its own penalties so being prompt is of the essence.

Once you are registered, you can file your return as you would normally, following the 31 January of the next calendar year deadline. Your registration also makes you eligible to receive the annual filing notice from HMRC that should ideally trigger your filing exercise. If you wish to file it online, you can do so on the Government Gateway page. Thereafter, you will be required to input updated and accurate information about the nature of your business, your financial records, and your expenses.

We here at Lawrence Grant aim to provide you with the most up-to-date facts about tax rates, your tax obligations, and the tax filing procedures. We understand your needs and those of your business and tailor our services to every client. We urge you to reach out in case you require further assistance.