Whether you are newly self-employed and feeling a bit out of your depth or you have been self-employed for a while but are worried you may have missed something, this tax term cheat sheet will help you get to grip with the basics you need to know.
HMRC (Her Majesty’s Revenue and Customs) is the government department responsible for setting out the tax rules, making sure everyone adheres to them and collecting taxes.
You’ll need to use your HMRC online account to manage all your taxes.
A tax year runs from 6 April to 5 April. All the tax rates and allowances you see relate to a single tax year and most change on 6th April at the start of each new tax year.
If you work for someone else and they work out all your tax for you, then this is employment. This is known as PAYE (Pay As You Earn).
You’ll receive a P60 which summarises how much you have been paid when you are employed. If you are employed and self-employed, you’ll need this when it comes to completing your tax return.
When you are employed and leave your job during a tax year, you’ll receive a P45 which summarises how much you have been paid during the tax year and the tax deducted. Again if you are employed and self-employed, you’ll need this when it comes to completing your tax return.
Self-employed or sole trader. Anyone who works for themselves is self-employed and responsible for reporting their earnings to HMRC and working out their own taxes.
A UTR (Unique Taxpayers Reference) Number is the reference HMRC given to you once you have successfully applied for self-employment. It is a 10 digit code that is unique to you and is HMRCs way of identifying you. You’ll need it every time you speak to HMRC as part of their security checks.
When you are self-employed you can deduct expenses from your income. The difference between these two is known as taxable profit and this is the figure used for working out your tax bill.
This is the tax-free amount that you can earn before paying tax. Once you earn above £100,000 your personal allowance is taken back, according to how much you earn until £123,000 where the allowance is lost entirely.
Here is the current personal allowance for 2019/2020:
|Personal Allowance Income Limit||£100,000||£100,000|
Income tax is the tax you pay on your earnings. You only pay income tax on your earnings above the personal allowance. Here are the current income tax rates for 2019/2020:
|Personal allowance 0%||£12,500|
|Basic rate 20%||£12,501 to £50,000|
|Higher rate 40%||£50,001 and £150,000|
|Additional rate 45%||over £150,000|
Class 2 National Insurance
Class 2 National Insurance is paid by anyone who is self-employed once their earnings reach the small profits threshold.
Class 2 National Insurance protects self-employed individuals ability to claim state benefits like pensions and maternity allowance.
|Small profits threshold – no NICs below this threshold||£6,475||£6,365|
|Class 2 National Insurance||£3.05 per week||£3.00 per week|
Class 4 National Insurance
Class 4 National Insurance is an amount self-employed individuals pay on their profits above the small profits threshold.
|Small profits threshold – no NICs below this threshold||£9,501||£8,632|
|Class 4 National Insurance 9%||£50,000||£50,000|
|Class 4 National Insurance 2%||over £50,000||over £50,000|
Self-Assessment Tax Return
A self-assessment tax return is a form you need to fill out once a year to declare all your income and calculate how much tax you have to pay.
Self-Assessment Tax Return Filing Deadline
You need to submit your self-assessment tax return by 31 January each year. You’ll also need to pay any tax you owe by this date.
There are penalties for missing this deadline and failing to pay your tax.
Payment on Account
A payment on account is a contribution towards your next tax bill and is due by 31 July each year.
It is 50% of your previous tax bill and needs to be paid by anyone:
- Whose tax bill is over £1,000;
- Who pays less than 80% of the tax they owe through the payroll system (it has been deducted at source).
VAT is a tax charged on UK goods and services. The standard rate of VAT is 20%, although there are reduced rates of 5% and 0% available for certain items.
Allowable business expenses are things that you pay for that you can set against your income to reduce your tax bill. Generally, most of the things you buy for your business will be allowable.
There are certain expenses that you pay for which you cannot set against your income to claim tax relief on – these are known as “disallowable expenses“.
Disallowable expenses include things like fines, penalties and entertainment.
When you buy more expensive pieces of equipment that you use to run your business that you’ll use for a number of years, like a laptop, you may need to use depreciation to write off the cost over the years you use it.
Depreciation is a disallowable expense so for tax purposes, you’ll need to claim capital allowances.
Bookkeeping is the recording of day-to-day financial transactions.
That’s things like:
- Bank payments and receipts;
- Logging cash expenses;
- Analysing out expenses.
Making Tax Digital
Making Tax Digital is the governments initiative to completely digitise the UK Tax System. Propose changes will affect everyone who is self-employed from 2020 (although that’s not confirmed).
It will mean you will need to manage all your bookkeeping on an approved software like Quickbooks.
New Here? These are my most popular resources:
- The Ultimate Bookkeeping Spreadsheet – Organise your money, track the numbers that matter and stay on top of your cash;
- FREE Guide: 11 Common Small Business Setup and Tax Mistakes – Are you worried your business isn’t set up correctly? Use this guide to identify whether you’re making the 11 most common financial pitfalls I’ve seen when it comes to setting up a business and taxes, as well as finding out how you can put them right;
- Sole Trader or Limited Company? – Download my free calculator to check which business structure would help you to pay less tax;
- FREE Business Expenses Cheatsheet – Check what you can and can’t claim as an expense against your taxes.
- 6 Core Elements of Self-Employment Taxes – Confused by taxes? Worried you’re missing something when it comes to tax allowances and reliefs? These easy to follow 6 mini-guides will have you on top of the tax side of things in no time at all.