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 2021 to 5 April 2022, 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 2022 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 2021-22
Notification of liability
Tax and tax return
Tax calculation
His tax is calculated according to the return entries as follows:
2021-22 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 |
|
(12,570) |
|
Taxable income |
|
5,430 |
|
Tax @ 20% |
|
1,086 |
|
Less: tax deducted at source |
|
(300) |
|
Tax due |
|
|
786 |
|
|
|
|
National insurance |
|
|
|
Profit |
16,500 |
|
|
Lower limit |
9,568 |
|
|
Profits for NI |
6,932 |
|
|
Class 4 NI @ 9% |
|
|
624 |
Class 2 NICs (flat-rate £3.05 p.w.) |
|
|
159 |
NICs due |
|
|
783 |
|
|
|
|
Total tax & NI payable |
|
|
1,569 |
He will then pay tax as follows:
Date |
Detail |
Tax |
31/1/2023 |
Final payment for 2021-22 |
1,569 |
|
1st Payment on account for 2022-23* |
705 |
|
|
|
31/7/2023 |
2nd Payment on account for 2022-23* |
705 |
|
|
|
31/1/2024 |
Tax liability for 2022-23 |
? |
|
Less: Payments on account already made** |
(1,410) |
|
Final payment for 2022-23 |
? |
|
1st Payment on account of 2023-24 |
? |
|
|
|
Notes
*
**
We don't know what James' tax bill is for 2022-23 so this is added when he files his next tax return.
It is possible that his income for 2022-23 will be lower than 2021-22. If so, he can ask HMRC to reduce his payments on account for 2022-23.
Next guide in this series
Agency or Umbrellas
How to check whether your agency is putting you into an illegal tax avoidance scheme.
Are you enjoying our content?
Thousands of accountants and advisers and their clients use www.rossmartin.co.uk as their primary TAX resource.
Register with us now to receive our unique FREE Tax Planning Tips and Advice Guide & our FREE OMB Newsletter.