What About Tax and National Insurance When You’re Self-Employed?
It’s fair to say that when entering the world of freelancers and contractors, ensuring you get your taxes paid on time, and being sure that you are paying the right amount can be a real challenge. Finding the time to continue working for clients, alongside filing your own accurate tax returns can cause issues for even the most experienced freelancers and contractors.
How The Self-Employed Can Manage Tax and National Insurance Responsibilities
It’s no secret that managing tax and national insurance responsibilities can be difficult for the self-employed, whether you are a freelancer or a contractor. There are a whole host of things that you must consider throughout the financial year, and not complying with any of your tax obligations could result in a hefty fine.
In this article, we will take a look at some of the key responsibilities that you have when it comes to tax, whilst also giving some insight into other frequently asked questions surrounding tax and National Insurance.
Difference Between A Sole Trader and Limited Company
When working as a self-employed individual, you can choose whether to operate as a sole trader or form your own limited company. The main difference between the two is that if you are a sole trader then there’s no legal separation between you and your business. This essentially means that you are personally liable for all activities of the business, including debts; so, if you did end up racking up debts as a sole trader you will be personally liable to pay off the debts yourself.
Whereas, if you form a limited company, you are effectively creating a completely separate legal entity, and have no personal liability for any debts. However, you’ll have specific legal and statutory responsibilities to fulfil as a director of the company, so it’s well worth baring this in mind.
Tax and National Insurance for Contractors
As a contractor there are a whole host of considerations when it comes to tax and National Insurance. Read on to find out everything you could ever need to know about tax and National Insurance for contractors working through a Limited Company
When earning over a certain earnings threshold, contractors are liable to pay National Insurance Contributions just like the average employee at any company.
In the 2019/20 tax year, employees must pay National Insurance Contributions of 12% on income falling between £166 and £962 per week, and 2% on any income above £962 per week. That means that you must pay 12% National Insurance Contributions on salaried income falling between the Primary Threshold of £8,632 and the Upper Earning Limit of £50,000 – an additional 2% on any additional income over £50,000.
If you are dealing with National Insurance yourself, you will need to submit a Self-Assessment form to HMRC each tax year. If you are working via an umbrella company or contracting directly with an agency, then your employer will take the National Insurance payment at source from your gross fees.
All limited companies must pay Corporation Tax on any profits that your business makes during the financial year. As well as profits, Corporation Tax is also due on any money that your limited company makes from investments and selling any capital assets for a profit, this is known as chargeable gains.
When you form your limited company, you must register your business for Corporation Tax with HMRC within three months of your business being incorporated with Companies House. Once registered, you will be able to sign in and report your Corporation Tax each year. You will usually have to pay the tax, or report you have nothing to pay, 9 months and 1 day after the end of your accounting period. Don’t worry about missing the deadline though, HMRC will send you a notification when your Corporation Tax needs to be paid.
At present Corporation Tax is currently set at 19%... Working out your Corporation Tax is done by multiplying the taxable profits for the year by 19%. Although this sounds simple, there is usually adjustments needed from the profits in the accounts to get to the taxable profit.
When you are working through a Limited Company, you will pay income tax based on, your indivual income, such as salary and dividends you have received from the company. You may also have income outside of the company as this will impact the amount of Income Tax payable.
The amount of income tax you will pay on profits is exactly the same as if you were employed by a company. For example, in the 2019/20 tax year you will need to pay the following income tax:
- If you earn between £0 and £12,500 a year, you will pay 0% income tax on earnings
- If you earn between £12,501 and £50,000 a year, you will pay 20% tax on earnings (basic rate)
- If you earn between £50,001 and £150,000 a year, you will pay 40% tax on earnings (higher rate)
- If you earn over £150,000 a year, you will pay 45% tax on earnings (additional rate)
Dividends are taxed differently to salary. The rate of tax payable on your dividend income will depend on the tax bracket the dividends fall in, with basic rate dividends being taxed at 7.5%, higher rate 32.5% and additional rate at 38.1%. Each individual currently has a £2,000 tax free dividend allowance available every tax year.
Filing Annual Accounts
At the end of each financial year for your limited company, you must prepare a full annual accounts based off your business’ financial records (these are often referred to as statutory accounts).
When putting together the records, you will need to include a ‘balance sheet’ which shows the value of everything that your limited company owns, owes and is owed. Along with this, you will also have a ‘profit and loss account’ that shows the company’s sales, costs, profits and losses.
If you are late submitting your company’s annual accounts, you will be subject to a fine, the longer you leave it the more you will need to pay.
It’s worth noting that many limited companies and contractors will hire an accountant to file their annual accounts as this can take a lot of pressure and stress off the individual, whilst also freeing up a significant amount of time.
If you would like to maximise your take home pay, whilst freeing up your own time, be sure to use our handy contractor tax calculator to see what you could be earning if you do choose to utilise the services of a reputable contractor accountants, such as Gorilla Accounting.
Tax and National Insurance for Sole Traders
When it comes to tax and National Insurance for sole traders, there are a few key differences you need to be aware of when comparing this to contractors working through a Limited Company. In the next section, we will take a closer look at everything you need to know when it comes to freelancers, tax and National Insurance.
Self-Employed National Insurance
National Insurance works in a slightly different way for anyone who is self-employed, with individuals contributing a set amount of money depending on how much profit you make in a financial year. For the self-employed, National Insurance is generally split into two types:
- Class 2 – you will fall into this category if your profits are £6,365 or more a year
- Class 4 – you will fall into this category if your profits are £8,632 or more a year
For the tax year 2019 – 2020, anyone who is in Class 2 will pay £3 a week on National Insurance, with anyone who falls into Class 4 paying 9% on profits between £8,632 and £50,000 – and 2% on profits over £50,000.
When it comes to paying your National Insurance, the vast majority of the self-employed will pay through the Self Assessment page on the Government’s website. It’s a relatively simple process, but can be time consuming!
If you do require any further assistance when it comes to any part of submitting your National Insurance or tax returns, then don’t hesitate to get in touch with the team here at Gorilla Accounting. Our team of self-assessment tax return accountants have years of experience dealing with all manner of tax returns for the self-employed, whilst freeing up your valuable time to earn even more or take a well-earned break.
Do I Need To Pay Corporation Tax?
If you are a sole trader, you won’t need to pay Corporation Tax. This is because you are simply working for yourself and are not affiliated to a company as such. This is one of the major differences as a limited company will pay corporation tax.
How Much Can You Earn Tax Free As A Self-Employed Worker?
When you are self-employed, you are entitled to exactly the same tax free personal allowance as a worker who is employed by a company. A personal allowance is simply how much you can earn before you start paying income tax. As of the 2019/20 tax year, the standard personal allowance sits at £12,500.
If you do happen to earn over £100,000, things change slightly, with the standard personal allowance of £12,500 being reduced by £1 for every £2 of income over £100,000 for the current tax year (as of 2019/20).
How Do I Pay Tax and National Insurance When Self-Employed?
Every year, you will need to submit a Self Assessment Tax Return for the previous tax year. For the 2018-19 tax year, your online tax returns will need to be submitted by 31st January 2020 – within this, you will need to declare your total income and expenses. Once you have completed and submitted this, HMRC will tell you exactly how much tax and National Insurance you owe and when this is due to be paid.
Accounting for contractors can be extremely difficult to get your head around when you are looking to run your limited company to the best of your abilities, so why not get in touch with the professionals to take some of that burden off you?
At Gorilla Accounting we take great pride in taking some of the pressure off your busy schedule, allowing you to take the time to grow your client base. Please feel free to speak with our friendly advisors to see how we can help you maximise your take home pay today!