How you are taxed, special rules for certain types of worker, how your taxes are paid?

When you are self employed you have to account for, and pay, your own tax and National Insurance contributions (NICS) to HM Revenue & Customs.

  • The amount of tax (and NICs) you pay is based on the size of your accounting profits earned in the tax year.
  • Your accounting profit is your employment income less your allowable expenses.
  • To work out how much tax is due, you need to add up you profit plus all your other income from different sources (e.g. employment, bank interest, dividends etc) and then deduct your personal allowance and any other tax allowances. The result is then taxed at a basic or higher rates, and NICs will be calculated based on your profit.
  • Expect your tax bill to be something like 10-29% of your profit (your tax bill depends on whether you have other income to use up your tax free allowances and what expenses you can claim to reduce your profit.

There are different ways of accounting and claiming your expenses.

  • This time we shown a business operating on a cash received/cash paid basis (the cash basis), claiming actual expenses.
  • Next time: we take a closer look at what you can claim and look at alternative claims and reliefs on offer.

Worked example

  • James is 'in business' as a self employed musician.
  • He prepares his accounts for each tax year (the tax year starts on 6 April and ends on the following 5 April)

In the tax year 6 April 2018 to 5 April 2019 he earns £25,000 per year from session work, gigging and busking.

He claims tax relief on his business costs of £5,000 which are incurred on:

  • Working from home: light and heating costs (he has studio where he writes and practices)
  • Travel to and from gigs etc (he is based at home and the gigs are all irregular)
  • Food and drink costs when he travelling for work
  • Accommodation costs where work requires him to stay overnight as he is unable to get home
  • Replacing and repairing his instruments
  • Telephone and office costs
  • Stage costume

He has also bought a new laptop and a van for his work this year, these cost him £3,500.

His total costs are £8,500 (5,000 + 3,500), making his profit for the year is £16,500.

His accounts for the year ending 5 April 2019 as as follows:

Account name £
Sales 25,000
Expenses:  
Direct costs (stage costumes) 800
Use of home 550
Office costs (telephone) 400
Motor and travel 2500
Subsistence 500
Accomodation 100
Repairs & renewals 150
Total expenses (5,000)
   
Net profit (Sales - expenses) 20,000
   
Less capital equipment costs (3,500)
   
Profit for tax 16,500

 

Other income for 2019/20

  • He has earned £25 in interest and received £250 in dividends from some shares left to him by his grandmother.
  • he also earned £1,500 working as a barman, his employer deducted £300 in tax from his employment income.

Notification of liability

  • James should have notified HMRC when he commenced self employment.
  • HMRC will then send him a Notice to File his tax return for 2018/19.

Tax and tax return

  • James must submit his 2018/19 return online by 31 January 2020, or to the date specified on HMRC's notice (if later).
  • He enters his self employed details in the self employed section of the return,  his employment details in the employment section and the interest and dividends income in the savings and investment pages.
  • To complete his return he needs to know his tax reference (UTR) and his National Insurance number (NINO) and his employer reference (this is from his P60 or P45 issued by his employr)

Tax calculation

His tax is calculated according to the return entries as follows:

2019/20 tax year £ £ Tax due
Employment income   1,500  
       
Self employed income 20,000    
Less expenses   (8,500)    
Taxable profit   16,500  
       
Interest 25    
Less savings allowance (25)    
Taxable savings income   0  
       
Dividend 250    
Less dividend allowance (250)    
Taxable dividend income   0  
Total income   18,000  
Less: Personal allowance   (11,850)  
Taxable income   6.150  
Tax @ 20%   1,230  
Less tax deducted at source   (300)  
Tax due     930
       
National insurance      
Profit 16,500    
Lower limit 8,432    
Profits for NI 8,068    
Class 4 NI @ 9%     726.12
Class 2 NICs (flat rate £3 p.w.)     156
NICs due     882.12
       
Total tax & NI due     1,812.12

 

He will then pay tax as follows:

Date Detail Tax
31/1/2020 Final payment for 2018/19 1,812.12
  1st Payment on account for 2019/20* 906.06
     
31/7/2020 2nd Payment on account for 2019/20* 906.06
     
31/1/2020 Tax liability for 2019/20    ?
  Less: Payments on account already made** (1,812.12)
   Final payment for 2019/20   ?
   1st Payment on account of 2020/21   
     

 Notes

*

  • Your first and second 'payment on account' are calculated as half of your tax liability.
  • You only make a payment on account if your tax liability is £1,000 or higher.

**

  • Your payments on account are payments of tax in advance of the following year and so these are deducted from your following year's tax bill

? We don't know what James' tax bill is for 2020/21 so this is added when he files his next tax return.

 

Next time: Alternative claims and reliefs and a closer look at expenses.

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