Tax doesn’t have to be taxing – remember HMRC telling you that?
That’s all well and good if you know what you are doing, but tax is pretty daunting when you are setting up on your own or running a small business and would much rather just be getting on with running your business!
However, you do need to at least have an understanding of what tax you will pay and when, so it doesn’t come as a total surprise when you or your accountant come to submit your tax return.
As a self employed person operating as a sole trader then you have to think about both income tax and National Insurance (NIC).
Most people know they have to pay tax at 20% (of something!) but often the NIC comes as a bit of a shock when they realize this is due as well.
So what is due when you are self-employed?
Income tax is due at 20% of your profit for the year. Profit is essentially your sales less your costs. Everyone has a personal allowance of £12,570 in this tax year, so you will not pay tax on the first £12,570 of your income, but after that you pay tax at 20%, up to the basic rate tax threshold (this year £50,270.) If your income goes over this amount, then your income tax rate goes up to 40%.
Being self employed you pay 2 types of NIC – class 2 and class 4.
Class 2 is a flat rate per week of £3.05 per week (£158.60 per year.) Although this is calculated as a weekly amount, it is actually paid once a year along with your self-assessment tax bill. Class 2 NIC gives you an entitlement to state benefits and a state pension when you retire.
If your profits are low (under £6,515 this year), you are exempt from paying class 2 NIC, but you have the option to pay it voluntarily. This is often a good idea to do, given the entitlement to benefits that it gives you, for a relatively low cost.
Class 4 NIC is based on your profits for the year. The rate is 9% and you pay this on your profits over £9,569 and up to £50,270. If your profits are more than this, the rate then falls to 2% on the higher profits.
Class 4 NIC is the one that tends to be forgotten, but at 9% of profit, it can add up. You could be in a position where you have class 4 NIC due, but not any income tax, if your profits are between £9,569 and £12,500)
Just a reminder as well that any SEISS grants received are taxable, and NICable (love that word!) and do need to be included on your tax returns. The grants are taxable when they are received, so the 4th grant due to be paid shortly will go on your 21/22 tax return, even though it related to Feb, March and April 21 (most of which is in the 20/21 tax year!)
There is a separate box on your tax return for 20/21 where you put the details of any SEISS grants received – presumably making it easier for HMRC to check your entitlement to it in the first place!
If you would like any further information or help with your tax return for 20/21, then please get in touch with Rosie Forsyth.