Posted on July 12, 2021
Guide for self employment
What is self employment:
Definition: “A person is self-employed if they run their business for themselves and take responsibility for its success or failure. Self-employed workers are not paid through PAYE, and they do not have the rights and responsibilities of an employee.”
You can check someone’s employment status online to see if a worker should be classed as employed or self-employed. If you cannot check online, contact HMRC.
Different types of self employment:
List of types of self employment:
- Sole proprietorships, Freelancers or Gig workers
- Independent contractor
- Capital gains, UK interest, dividend etc…
- Property income
- Private limited company or Single member LLC
- Partnership: includes General partnership, Limited partnership, Limited liability partnership and LLC partnership
Check list for self employment:
Here are document check list for self employment
- Register for self assessment with HMRC (NB: If earned after 6th Apr, deadline is by 5th Oct)
- File annual self assessment tax return (NB: Deadline is 31st Jan)
Brief mention what to do when setting up a business:
- Set up a work bank account
- Have the right insurance such as employers liability insurance and public liability insurance.
- Set up financial system and bookkeeping with record keeping (usually up to 2 to 5 years – read more here).
Read more about setting up business here […]
Dates of Deadlines:
UK tax date runs from 6 April to the following 5 April. In this case, we will use the example of tax year 2021/2022 refers to 6 April 2021 and finish on 5 April 2022, in which you should start filling in your earnings within that period. Below are the following dates for tax year 2021/2022.
1. Register for self assessment with HMRC:
Register when you start trading and by 5 Oct following the end of tax year in which you started self-employment at the latest. In this case, for those who started earning after 6th Apr 2021, the deadline for registration is on 5 Oct 2022 [31 Oct 2022 for filing in paper].
2. Self assessment tax return:
Mid night 31 Jan 2023 [31 Oct 2023 for filing in paper] – for tax year ending on 5 Apr 2022
3. Pay tax you owe:
i.e. if you owe tax for the 2020/21 tax year this is due by 31 January 2022.
Mid night 31 Jan 2023.
4. Final contribution for tax year:
31st Jul 2023 (for tax year 2021/2022)
5. Automatic collection tax return (via PAYE tax code):
30 Dec – Not often used
More about Self Assessment tax return:
How do I register for self employment?
Self employment can be registered online at GOV.UK and can be done completing an online form CWF1. Alternative ways to register is calling HMRC helpline or printing the form and posting it to the HMRC.
The registration process covers both tax and National Insurance contributions (NIC).
Self Assessment tax return:
Do I need to fill in a Self Assessment tax return?
Yes if self-employment income is over £1,000, partner in a Business Partnership, earn over £100,000 or earn over £2,500 from renting out property or untaxed income (such as from tips or commission). It is also for those who wants to make voluntary Class 2 National Insurance contribution. For more information, click here.
How do I register for Self Assessment tax return?
You’ll have to first register for Self Assessment at the GOV.UK website. Once registered, you’ll receive a Unique Taxpayer Reference (UTR), which can be used to submit your Self Assessment tax return.
Where do I submit my Self Assessment tax return?
Self Assessment tax return can be submitted online. You’ll need to set up a Government Gateway account. For information regarding paper application click here.
What do you need to fill in my Self Assessment tax return?
Before you start, you’ll need the following information:
- your ten-digit Unique Taxpayer Reference (UTR)
- your National Insurance number
- details of your untaxed income from the tax year, including income from self-employment, dividends and interest on shares
- records of any expenses relating to self-employment
- any contributions to charity or pensions that might be eligible for tax relief
- P60 or other records showing how much income you received that you’ve already paid tax on.
How do you fill in a Self Assessment tax return?
The first section is the SA100 which deals with the following: taxed and untaxed income in the form of dividends and interest, pension contributions, charitable donations and benefits (including State Pension, Child Benefit and Blind Person’s Allowance).
Another section is the supplementary page for extra income to declare from self-employment (SA103), property (SA105) or capital gains (SA108). Company director, a foreign national (or dual resident), from self-employment, property, Capital Gains or from abroad. In these pages, you’ll need to report income from these sources that you haven’t paid tax on and declare any allowable expenses.
The short-form tax return (SA200) don’t have to be filled. HMRC will send it to you.
Situation when you are both employed and self employed?
In situation when you are both self employed and employed (via PAYE or CIS) you include all your income including income that already has tax deducted. You input the tax that has been deducted at source.
How is tax return calculated?
If you submit your tax return online, HMRC’s online system will calculate your tax automatically, and you can view the calculation online or print it out. If you submit your tax return on paper, HMRC normally calculate your tax for you and send you a tax calculation in the form SA302. In order to receive a paper form SA302, usually you must submit your paper tax return before 31 October and ask HMRC to work out your tax, by ticking the relevant box on the tax return.
The tax calculation will then automatically take account of any tax paid at source (for example, through CIS or PAYE) so the final position shown by the calculation will be the amount that is left to be paid through Self Assessment or to be refunded. Any payments on account already made should then be compared to the final position shown by the calculation to see whether there is any further amount to pay (known as the balancing payment) or to be refunded.
IMPORTANT: Do not include any tax paid as a payment on account because it will not show up in the HMRC’s calculation (either on the SA302 calculation or the online system) and should be considered separately when working out what tax is still left to pay.
Example:
Miss 9 is employed part-time and also runs her own business. During the 2020/21 tax year she earns £15,000 from her job and pays tax through PAYE of £500, she also earns profits of £4,000 from her self-employment. When Miss 9 completes her 2020/21 tax return she includes all her employment income and tax deducted through PAYE and her self-employment profits. Her tax calculation will look as follows (ignoring National Insurance contributions for this illustration):
| Tax calculation | |
| Employment income | £15,000 |
| Self-employment profits | £4,000 |
| Total income received | £19,000 |
| minus Personal Allowance | (£12,570) |
| Total income on which tax is due | £6,430 |
| Income tax due at 20% | £1,286 |
| minus tax deducted | (£500) |
| Total income tax due by 31 January 2022 | £786 |
We illustrate this below:
Assume that Miss 9 had higher profits in the 2019/20 tax year so was due to make payments on account totalling £1,200 for the 2020/21 tax year as follows:
- 31 January 2021: £600
- 31 July 2021: £600
When Miss 9 submits her 2020/21 tax return online in November 2021 her total income tax due would still show as £786 even though she is actually due a refund of £414 (£600 +£600 less £786) as she has overpaid her tax through payments on account. Miss 9 will need to deduct her payments from the online calculation to work out she is due a refund. After the online tax return has been automatically processed Chloe should be able to see that she is due a refund in her HMRC personal tax account and claim this back from HMRC.
Paying your Self Assessment tax:
How do you know how much you’ll need to pay?
When submitting your Self Assessment tax return, you’ll be told how much tax and National Insurance contribution you’ll need to pay.
When is the deadline for payment?
The deadline is on the 31st of January. There will be penalty when you miss the deadline. It is usually a penalty of £100 for up to 3 months late.
NB: National Insurance contributions and Capital Gains Tax aren’t included in your ‘payments on account’, and will need to be paid in full by the 31 January deadline.
Paying via instalment date:
Generally speaking you pay your income tax in three instalments as follows:
| 31 January in the tax year to which the tax bill relates | 50% of prior year liability (known as first payment on account) |
| 31 July following the tax year to which the tax bill relates | 50% of prior year liability (known as second payment on account) |
| 31 January following the tax year to which it relates | balance of any tax due (known as balancing payment) PLUS first payment on account for next tax year |
Note: Class 2 NIC, Capital Gains Tax, and/or student loan repayments due are always paid as part of the balancing payment and are not included in payments on account.
Example:
Mr A has an income tax (including Class 4 NIC) liability of £2,500 for 2019/20 and he also has a Class 2 NIC liability of £156, Therefore his total payments for the 2019/20 tax year are £2,656. His income tax (including Class 4 NIC) liability for 2020/21 is £3,500, and his Class 2 NIC bill is £158.60.
His payments for 20/21 are as follows:
| 31 January 2021 | £1,250 (50% of £2,500) |
| 31 July 2021 | £1,250 (50% of £2,500) |
| 31 January 2022 | £2,908.60 which is £1,000 (balancing payment) PLUS £1,750 (50% of £3,500) PLUS £158.60 (Class 2 NIC) |
You will see that in this case for Mr A there are two amounts of tax being paid on 31 January– the balance of tax due for one year and a payment on account for the following year.
Method of payment:
The fastest ways to pay are: online or telephone banking, Clearing House Automated Payment System (CHAPS), debit or corporate credit card or in person at your bank or building society. But you can arrange for a bank transfer, Direct Debit or send a cheque. Follow the instruction in the Self Assessment tax how to pay.
Who is exempt from paying Self Assessment tax?
The exceptions are subcontractors in the construction industry who often have tax deducted from payments made to them under the Construction Industry Scheme (CIS) rules and examination markers who usually have tax deducted at the basic rate but not NIC.
Other facts:
For example, if your tax bill for 2018/19 was £1,500 – during the 2019/20 tax year, you’ll make two payments on account of £750 each. When you submit your 2019/20 tax return, these two payments are deducted from your tax bill.
So, if your 2019/20 tax bill was £3,000, £1,500 (two payments on account) will be deducted. And you’ll have to pay £1,500 as a balancing payment, plus an extra £1,500 as your first payment on account for the 2020/21 tax year.
If your tax bill is less, HMRC will send you a refund. If you know your tax bill will be lower, you can contact HMRC and ask for a reduction on your payments on account.
Amending mistakes in tax return:
Mistakes in our tax return may occur. Example of common mistake in tax return could be due to over payment of tax or when grants are involved such as Self-Employment Income Support Scheme (SEISS).
To make am amendments to your tax return, GOV.UK provide instruction in how to do so. The time frame to make amendments is up to 12 months from 31 January following the end of the tax year. Or if the notice to file a return was issued after 31 October, you can amend the tax return within 15 months of that notice being issued.
For instance, if you need to amend your 2020/21 tax return you normally have until 31 January 2023 to make the amendment. Or if, for example, you did not receive a notice requiring you to file your tax return for 2020/21 until 12 December 2021, then you can amend it up until 11 March 2023.
If you need to amend your tax return outside of these time limits then you need to notify HMRC so that your tax position can be corrected. If additional tax is due HMRC should issue a revised calculation once the mistake is rectified and there may be penalties.
Other useful info:
If you miss the submission date an automatic penalty of £100 for late filing will be charged, even if you have no tax to pay or you have already paid the tax you owe. See our penalties page for more information. To find more about penalty for late payment or registration, please read more here.
You only need to register your self-employment once with HMRC and on your Self Assessment tax return you provide details of your two separate businesses.
How much NIC to pay?
You can obtain details in the page What National Insurance do I pay if I am self-employed?.
Reference:
https://www.litrg.org.uk/tax-guides/self-employment/what-trading-allowance
https://www.litrg.org.uk/tax-guides/self-employment/how-do-i-pay-tax-self-employed-income
https://www.litrg.org.uk/sites/default/files/files/LITRG-Self-Employment-guide.pdf
https://www.moneyhelper.org.uk/en/work/self-employment/how-to-fill-in-a-self-assessment-tax-return
https://www.litrg.org.uk/tax-guides/tax-basics/do-i-need-complete-tax-return#:~:text=If%20HMRC%20ask%20you%20to,January%20(for%20online%20returns)%3B
https://www.litrg.org.uk/tax-guides/self-employment/when-do-i-make-self-assessment-payments-and-file-my-tax-return