Help please with tax & self employment!

emmamack

Hello all

I recently registered as self employed for website and graphic design work. I have a full time job already and so this is freelancing work in my spare time. I'm obviously already then paying tax and NI on the PAYE system.

I was advised when I registered to complete the national insurance form for low earners so that I do not have to pay any NI contribution on my self employed earnings (due to how small they're likely to be!).

I understand that I need to keep invoices and a record of what I've earned over the year so that I may fill out a tax return at the end of the tax year. What I'm a little uncertain on is exactly how much tax I'll have to pay. Sorry if this is a silly question but I'm new to all of this and want to make sure I work it all out right so that I don't have any nasty surprises at the end of the year! Is there just a set percentage of tax that I will have to pay on my self employed earnings, and if so can you tell me what it is?

Many thanks in advance for your comments!

Emma

Tallymanjohn

If you're in full time employment, your tax allowance (the untaxed portion of your income) will be taken up with that, so any extra income you have (as freelance) will be fully taxed at normal rates (currently 22% if you're a basic rate tax payer). I'd recommend you get a basic spreadsheet set up to let you keep track of income & outgoings - you might also find it beneficial to set up a separate bank/BS/savings account, just to keep your SE earnings in. If your business turnover is less than £15,000 then you will also only need to complete a short tax return - much simpler to do.

emmamack

Thanks very much - I was a little confused with it! Yes I am a basic tax rate payer so then its 22%. Your help is much appreciated.

Paul_N_4

National Insurance Contributions (NICs) are as folllows (someone correct me if I'm wrong):

Class 1s: 11% up to upper earning limit then 1% thereafter
Class 2s: £2.50 per week
Class 4s: 8% up to upper earning limit then 1% thereafter

As an employee and a self-employed person, HMRC will expect you to pay all three when you first register your self employment. In fact the first thing that drops through the letter box is a bill for back dated Class 2 NICs.

You will also be charged Class 4 NICs at time of self assessment.

The good news is you can apply for exemption from Class 2 and Class 4 NICs if you are both employed and self-employed. But you have to do this yourself by filling in the relevant forms from HMRC.

You will then be charged Class 1 NICs on your employed earnings at 11% as usual. If your employed earnings do not hit the upper earnings limit for NICs, Class 4 NICs will take over and you'll be charged 8% till you hit the upper earning limit. Then you'll be charged 1% on all taxable income thereafter.

If you do not apply for exemption. You'll be charged 11% on your employed eanrings up to the upper earning limit. You'll be charged 8% on all self-employed taxable income up to the upper earning limit. And you'll be charged £2.50 per week.

As you supply all employed and self-employed income information in your self assessment, you'd think it would be a pretty simple proceedure to recognise that you're both employed and self-employed, and the computer will automatically figure that you're paying too much NICs. However, HMRC obviously see this differently (for obvious reasons) and would prefer you to jump through hoops to figure this out for yourself. And you have to apply for exemption every year.

I dread to think how many people in this situation pay far to much National Insurance and don't even know it. And you can rest assured that HMRC certainly won't tell you.

emmamack

Hi, thanks for all that. I think I understand it all (just!). Can I just clarify then - I will need to apply for NI exemption on my self employed earnings EACH year?

Thanks

Paul_N_4

That's right.

Have a read here: http://www.hmrc.gov.uk/nic/deferment.htm (you want the form - CA72B).

Its a short form, so not really a problem. Just asks for your estimated employment income and your estimated self employment income. Its just silly that you have to do it manually when all the info you provide is provided on your tax return anyway. And yes you have to do this each year.