This is the first time I've worked for myself...
If you were previously an employee, you probably didn't have to think about income tax and National Insurance, let alone care. The payroll department deducted them automatically from your gross earnings and you netted the balance. Now that you work for yourself, obviously, you are responsible for sorting out your National Insurance and income tax. It's simple enough.
What tax do I pay as a self-employed person?
When self-employed you pay the following taxes to HMRC [Her Majesty's Revenue & Customs], all collected at the same time:
- Income tax,
- Class 2 National Insurance contributions (NICs), which are set at a small fixed amount per week,
- Class 4 National Insurance contributions, which are based on your business profits at the year end.
When is self-employment income tax payment due?
As a self-employed person, you will pay your tax and NICs on the 31 January following the end of your tax year. However, HMRC will ask for payments on account for the following year's estimated tax - on 31 January and 31 July each year. Therefore, after your first year, your tax bill may actually be 150% of the amount you were expecting, with a further 50% due in July.
Do I need to put some money away for tax payment each month?
That's a wise idea. It's important to provide for these liabilities to ensure that interest charges and late payment penalties do not arise, which can significantly increase your liability. By doing income tax calculation and putting away some money from your earnings each month, say, 25% of your gross earnings, you should have enough money in the bank to take care of your tax bills.
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What happens if I don't pay my tax bills on time?
You will have to pay penalty charges. As well as failing to complete your returns on time, you can be fined for failing to register your business when you start up (you could be fined up to 100% of the tax due in addition to any unpaid tax). It's best to register as soon as you can - it's such an easy process. You can register online using the HMRC Online Service or by calling the HMRC 'Helpline for the Newly Self-Employed' on 0300 200 3504.
What do I need to be aware of when becoming self-employed?
The importance of selling would come high up the list. When you work for yourself, you have to be able to make sales - no matter what you do - or the business simply won't survive, no matter how good you are at other things. You also must take care of your own bookkeeping, which can come as a bit of a shock - or pay someone else to do it. You may have to spend a significant amount of your time doing things you haven't done before or doing things you don't like. These can take up a lot of time.
But doing my own finances saves me money…
Well, possibly… But with certain tasks, if you work out the number of hours you spend doing them each week at the rate you could earn by doing something else, including making sales, you could find you would be better off outsourcing. Providing your business can afford to do so, of course. That includes getting an accountant to look after your tax returns, even if you decide to do your own basic bookkeeping. Money you spend on an accountant's services can be claimed as a business expense, of course. You can even save some money by taking care of basic record keeping, and then get an accountant to do your returns or company accounts.