A Guide to Paying Taxes on Self-Employed Income
Anyone who earns a living in the UK must pay income tax, including self-employed persons. Having no boss means taking on tasks that HR departments would do for you, such as filing taxes. If you are not sure where to begin, keep reading; here is our guide on how to file taxes if you run your own business.
What is income tax in the UK?
In the UK, income tax comes from profits or earnings by individuals. Taxes are filed yearly, and HM Revenue and Customs (HMRC) sets the deadlines for tax returns every year. A person who works for another company gets their taxes deducted before getting their monthly salary. In contrast, self-employed people have to learn their deductions based on their income.
They have a different payment scheme. If you are a freelancer doing creative work or if you work in a trade, you must pay taxes as a self-employed person. An accountant for tradesmen or freelancers can outline the responsibilities you have as a taxpayer.
How much taxes do self-employed individuals pay?
The income tax you must pay largely depends on two things; first, how much of the income is above the personal allowance; and second, how much income you earn within a tax band.
All workers have a portion of their earnings which is tax-free. In the 2018-2019 tax year, the personal allowance was £11,850, while it is £12,500 for the 2019-2020 tax year. The current tax year is from 6 April 2020 to 5 April 2021, and the allowance is at the same rate as the previous year’s.
Basic income tax rates are at 20 percent. You must set aside 20 percent of your income if you earned £12,501 to £50,000 in the 2019 to 2020 tax year. The higher rate, which applies to earnings between £50,001 and £150,000, is 40 percent. Finally, individuals earning above £150,000 have a 45 percent tax rate.
A self-employed person can reduce their taxable income through business needs. For example, they can offset expenses used for accounting, for buying equipment at the office, and more. The government has guidance on allowable deductions, as well as a budget reckoner for self-employed workers.
When do I pay taxes as a self-employed person?
You must file the Self Assessment by 31 January of the current tax year. If you cannot meet the deadline, you will have to face penalties. Aside from self-assessment, you must also pay outstanding taxes.
Budget for this as early as possible—in your first year of paying, you must pay 50 percent of the last tax bill towards the next cycle. If you have no business background and are only starting to work for yourself, you should get a professional to help you.
An accountant for photographers, for example, or an accountant for designers can advise you on the different schemes and help with documentation.
How do I file income tax returns?
Every year, you will receive a notice to file taxes, and you can do so at any point within the tax year. Do not wait until the last minute to submit; otherwise, you will be pressured and might miss an important step or two.
Also, use the online tools for filing Self Assessment. Before you can use the portal, you must get a Unique Taxpayer Reference (UTR). You also have to create and activate an account using a code you will receive in the post. Note as well that this would take several days to arrive, so you should figure that into your schedule.
Once you have activated your account, you can prove your identity and use your Government Gateway login. After you log in, you have to complete a questionnaire on your business, other sources of income, and your expenses. You can write your expenses as one figure or break it down into items for more detail.
Successfully filing your taxes relies on having complete and accurate records of your cash flow throughout a tax year. Keep your invoices and receipts and be sure you have a document listing all the transactions. To make things simple for you, get an accountant who can focus on the details of your reports.
Choose 1 to 1 Accountants as your partner for your business’ income tax filing needs. We provide accounting services for small businesses in Hillingdon, and we specialise in helping beginning self-employed individuals. Visit our Knowledge Centre for more free resources, or get a free initial consultation with one of our experts today.