Knowing what tax applies to you and which you have to pay when self employed can be slightly daunting! This week’s blog, and accompanying video will hopefully give you a good indication of what might be applicable to you.
If you are thinking about, or are already running a Limited Company you can pay yourself a nominal salary which is subject to income tax (PAYE) at 20% below £42,475 and National Insurance Contributions, both employer’s at 13.8% and employees at 12%. Remember, the Director’s salary is subject to both because you are an employee and employer of your business.
After you’ve paid yourself a salary, and deducted relevant business expenses, you are left with taxable profit, subject to Corporation tax at 20% on profits below £300,000. You have 9 months and 1 day after your financial year end to submit to HMRC your Corporation Tax Return. To be safe, we recommend you set aside one third of your projected profits to pay this tax. But don’t worry; QAccounting can give you advice on how much you’ll need!
The profits you earn through a Limited Company can be withdrawn in the form of dividends. Once you withdraw over £42,475 from your company, any dividends you take out thereafter will be subject to High Rate dividend tax at 32.5% below £150,000. If you do this you will incur an Additional Personal Tax bill. Dividends are declared in your Personal Tax Return along with any salary you pay yourself and any other additional income.
Apart from running your own Limited Company can also operate as a Sole Trader. A Sole Trader is someone essentially self employed and trading in their own right but does not have a Limited Company. This means you will be subject to different taxes to those described above. As a Sole Trader all your earnings (profits) are assessed for income tax in your Personal Tax Return. The standard rate of income tax is 20% but, if your profits exceed £35,000, you will incur higher rate income tax at 40%. There are many factors involved however; and it may be a good idea to think about setting up a company if you think your profits will reach higher rate income tax.
In addition to paying income tax as a Sole Trader, you also pay National Insurance Contributions. You pay National Insurance contributions to build up your entitlement to certain state benefits, including the State Pension. The contributions you pay depend on how much you earn and whether you’re employed or self-employed. You stop paying National Insurance contributions when you reach State Pension age.
As a self employed individual you should pay class 2 and 4 NIC. Quite simply class 2 NIC is a flat rate of £2.50 per week which you can arrange to pay over to HMRC via direct debit – Simples! Class 4 is assessed in your Personal Tax Return and is payable on profits between £7,225 up to £42,475 generated at 9%.
If you want to learn more about your tax liabilities, please get in touch with a member of our team today.
The article helps self-employed sole traders and partnerships to understand how basis period reform will impact their business in the 2023/24 transitional tax year, and what steps need to be taken to ensure they do not lose any brought forward tax reliefs and remain compliant!
The article outlines the typical tax payment dates and methods of estimating the values of tax payable for each type of tax, including VAT, PAYE, NIC, CIS, Corporation Tax, and Dividend and Personal Taxes.