Tax for part time self-employed individuals

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Deciding whether to be an employee or self-employed can be tricky. Especially when it comes to tax.

Being an employee provides the financial security of a monthly salary, plus an employer’s pension. On the downside, it can feel restrictive. Pay rises may be infrequent or modest.

Self-employment, means that you are your own boss, have more freedom about the type of work, who for and the pay. But because work is rarely guaranteed, or because contracts are usually more short-term than employee contracts, the income of the self-employed is more precarious

More of us are deciding to do both. Distinctions between employment and self-employment are blurring. More of us are combining employment with freelance work.

Part time self-employment grew by 88% between 2001 and 2015, compared to 25% for the full-time self-employed, according to official figures from Office for National Statistics (ONS)published in July 2016.

The freelance economy

This growth is one of the main reasons for the record number of Britons who are self-employed, according to the ONS.

Becoming self-employed, even if it’s just part-time, has tax implications.

If you start working for yourself, you’re classed as a “sole trader” - even if you haven’t yet told HM Revenue and Customs (HMRC).

You must register for VAT if your turnover is over £83,000. You can register voluntarily if it suits your business, for example if you sell to other VAT-registered businesses and want to reclaim the VAT.

You’ll be responsible for paying tax, rather than your employer.

You’ll need to register as self-employed to make sure you pay the correct income tax and National Insurance and file an annual self-assessment tax return for your self-employed income. (The government’s web site (gov.uk) has guidance on this and all parts of tax and self-employment.)

Working out whether you’re employed or self-employed is usually straightforward, but sometimes it’s more complicated. For example, you could be employed in one job and at the same time be self-employed in a different job.

HMRC says that you’re probably self-employed if, among other things, if you:

  • Run your business for yourself and take responsibility for its success or failure
  • Have several customers at the same time
  • Can decide how, where and when you do your work
  • Can hire other people at your own expense to help you or to do the work for you

HMRC’s website has a tool called the “employment status indicator” that will work out your employment status based on your answers to a series of questions. It’s anonymous and won’t ask for your name or other personal details.

You’ll pay tax on your taxable profits − your yearly income, minus allowable business expenses (e.g. office costs such as stationery and phone bills, travel costs such as parking, train or bus fares and advertising or marketing, e.g. web site costs), annual investment allowance, capital allowances and losses.

Budgeting for tax

Generally, accountants recommend that you set aside about 25% or 30% of your income for your tax (income tax and national insurance contributions. Paying an accountant to manage your tax affairs may save you time and money. (Plus their cost can be claimed as a business expense).

The self-employed pay a different type of national-insurance contributions to the employed.

If you’re self-employed with profits of £5,965 or more a year, you’ll pay “class two” of national insurance (£2.80 a week).

If you earn £8,060 or more a year, you’ll pay “class four” national insurance (nine per cent on profits between £8,060 and £43,000 and two per cent on profits over £43,000).

You’ll normally have to make two tax payments “on account” every year.

Each payment is half your previous year’s tax bill. Payments are due by midnight on 31 January and 31 July, if you pay online.

If you still have tax to pay after you’ve made your payments on account, you must make a ‘balancing payment’ by midnight on 31 January next year.

You can see your self-assessment tax statement by logging in to your online account
You’ll see payments on account you’ve already made payments you need to make towards your next tax bill.

If you know your tax bill is going to be lower than last year, you can ask HMRC to reduce your payments on account.