If you are self-employed in the UK, it is important to understand the tax system so that you can manage your finances effectively and avoid any unexpected bills. This guide will provide an overview of the main taxes you will need to pay and answer some common questions about the tax system.
Taxes are an important part of life, and understanding the tax system in the United Kingdom is essential for anyone living or working there. This article will provide an overview of the taxes that apply in the UK, with a focus on their different types and how they are calculated. We will also cover key facts about taxation to help you make informed decisions regarding your financial obligations. Finally, we will look at ways to reduce your tax burden and take advantage of any available tax breaks.
Income Tax
As a self-employed individual, you will need to pay Income Tax on your profits. This is calculated by subtracting your allowable expenses from your income, and then applying the relevant tax rate. The tax rates for 2022/23 are:
- Basic rate: 20% on taxable income up to £50,270
- Higher rate: 40% on taxable income between £50,271 and £150,000
- Additional rate: 45% on taxable income above £150,000
Personal Income Tax
In the UK, personal income tax is a tax levied on the earnings of individuals. It is calculated based on an individual’s annual income, including their salary, wages, and other taxable benefits. For 2021/22 tax year, the basic rate of personal income tax in the UK is set at 20% for those earning between £12,571 to £50,270 per annum.
In addition to the basic rate of personal income tax, there are also higher rates for those who earn above this threshold. The higher rate currently stands at 40% for those earning between £50,271 and £150,000 per year. There is also an additional rate of 45% for individuals who earn above this threshold.
It’s important to note that certain deductions can be made from your taxable income which may reduce your overall liability. Common examples include contributions towards pension schemes or charitable donations made through Gift Aid. By staying informed about applicable rates and allowances while maximizing deductions where possible will help ensure you only pay what you owe while avoiding potential penalties or fines down the line.
Corporate Income Tax
Corporate income tax is a tax levied on the profits made by companies during their financial year. In the UK, this tax is also commonly referred to as corporation tax. The rate of this tax is currently set at 19% and applies to all types of businesses including limited companies, foreign companies with a UK branch or office, members’ clubs and trade associations.
It is important for businesses operating in the UK to understand their corporate income tax obligations in order to avoid any penalties or legal issues. This includes keeping accurate records of their financial activities throughout the year, completing and submitting annual corporation tax returns on time, and paying any outstanding taxes owed by the relevant deadline.
Additionally, there are various allowances and deductions that businesses can claim against their taxable profits such as capital allowances for plant and machinery purchases or research & development expenses. Seeking professional advice from an accountant or tax specialist can be beneficial in ensuring that a business maximizes its allowable deductions while complying with all necessary regulations.
National Insurance
In addition to Income Tax, you will also need to pay National Insurance contributions (NICs). These are a tax on your earnings and go towards funding state benefits such as the State Pension and the NHS.
The amount of NICs you pay depends on your profits and your age. For the 2022/23 tax year, the rates are:
- Class 2: £3.10 per week on profits above £6,515
- Class 4: 9% on profits between £9,568 and £50,270, and 2% on profits above £50,270
You will only need to pay Class 2 NICs if your profits are above the small profits threshold of £6,515. If your profits are below this threshold, you can choose to pay Class 2 NICs voluntarily to maintain your entitlement to certain state benefits.
VAT
If your annual turnover is over £85,000, you will need to register for VAT (Value Added Tax). This is a tax on the value added to goods and services at each stage of production and distribution.
Once you are registered for VAT, you will need to charge VAT on your sales and pay VAT on your purchases. You can reclaim the VAT you have paid on your purchases from the VAT you have charged on your sales.
Self Assessment
As a self-employed individual, you will need to complete a Self Assessment tax return each year. This is a form that you fill in to declare your income and expenses to HM Revenue & Customs (HMRC).
You will need to complete your Self Assessment tax return by 31 January following the end of the tax year. For example, your tax return for the 2021/22 tax year will need to be submitted by 31 January 2023.
Frequently Asked Questions
- How do I register as self-employed?
Ans: You can register as self-employed online with HMRC. You will need to provide details such as your name, address, National Insurance number, and the date you started trading.
- How do I pay my taxes?
Ans: You can pay your taxes online, by phone, or by post. You will need to make payments on account if your tax bill is more than £1,000 per year. Payments on account are advance payments towards your next tax bill.
- What expenses can I claim?
Ans: You can claim expenses that are wholly and exclusively for the purposes of your business. This includes things like office rent, equipment, and travel costs. You cannot claim expenses that are personal or not related to your business.
- What happens if I don’t submit my tax return on time?
Ans: If you miss the deadline for submitting your tax return, you may be charged a penalty. The amount of the penalty depends on how late your tax return is and whether you owe any tax.
- What happens if I can’t pay my tax bill?
Ans: You should contact HMRC as soon as possible to discuss your options. They may be able to arrange a payment plan or offer support and advice on managing your finances.
- Do I need an accountant?
Ans: While it is not a legal requirement to have an accountant, it can be helpful to have professional advice and support to ensure that you are meeting your tax obligations and making the most of available deductions. An accountant can also help you to manage your finances and plan for the future.
- Can I claim Universal Credit if I am self-employed?
Ans: Yes, you may be eligible for Universal Credit if you are self-employed. However, your earnings will be taken into account when calculating your entitlement, and you will need to provide evidence of your income and expenses.
Conclusion
Managing your taxes as a self-employed individual in the UK can seem daunting, but by understanding the basics of the tax system and keeping accurate records, you can ensure that you stay on top of your finances and avoid any surprises come tax time. Don’t hesitate to seek advice from HMRC or an accountant if you have any questions or concerns.