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How are you taxed and what are the special rules for certain types of workers? 

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

There are different ways of accounting and claiming your expenses.

Worked example

In the tax year 6 April 2020 to 5 April 2021, 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:

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 £16,500.

His accounts for the year ending 5 April 2021 are as follows:

Account name

£

Sales

25,000

Expenses:

 

Direct costs (stage costumes)

800

Use of home

550

Office costs (telephone)

400

Motor and travel

2,500

Subsistence

500

Accommodation

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 2020-21

Notification of liability

Tax and tax return

Tax calculation

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

2020-21 tax year

£

£

Tax due

Employment income

 

1,500

 

 

 

 

 

Self-employed income

20,000

 

 

Less: capital expenses

  (3,500)

 

 

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

 

(12,500)

 

Taxable income

 

5,500

 

Tax @ 20%

 

1,100

 

Less: tax deducted at source

 

(300)

 

Tax due

 

 

800

 

 

 

 

National insurance

 

 

 

Profit

16,500

 

 

Lower limit

9,500

 

 

Profits for NI

7,000

 

 

Class 4 NI @ 9%

 

 

630

Class 2 NICs (flat-rate £3.05 p.w.)

 

 

159

NICs due

 

 

789

 

 

 

 

Total tax & NI payable

 

 

1,589

 

He will then pay tax as follows:

Date

Detail

Tax

31/1/2022

Final payment for 2020-21

1,589

 

1st Payment on account for 2021-22*

715

 

 

 

31/7/2022

2nd Payment on account for 2021-22*

715

 

 

 

31/1/2023

Tax liability for 2021-22

   ?

 

Less: Payments on account already made**

(1,430)

 

 Final payment for 2021-22

  ?

 

 1st Payment on account of 2022-23 

 

 

 

 

 Notes

*

**

We don't know what James' tax bill is for 2021-22 so this is added when he files his next tax return. 

Due to COVID-19 it is possible that his income for 2021-22 will be lower than 2020-21. If so, he can ask HMRC to reduce his payments on account for 2021-22.

Next guide in this series

Agency/umbrella tax-avoidance risk
How to check whether your agency is putting you into an illegal tax avoidance scheme.

 


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