Self Employment CIS Scheme & National Insurance

jamclock

Hello,

My questions are that I have a chance to go self employed and I am confused by what amount of National Insurance I am required to pay, some say I have to pay class 2 contributions and the some say if I go as a sub contractor on the new CIS then I will be deducted 20% tax at source and also 8% class 4 contributions, any help is appreciated. Also is this affected by profits and what is classed as profits and also what tax costs can I claim back against being self employed. Thanks.

Murdina

There are a lot of points here but I will try and sort them out as far as I can and maybe others can add.

1) becoming self-employed - first of all be aware this is not a choice; you must be genuinely self-employed - this can be quite an issue especially in the building industry in which you presumably work

2) assuming you are you must register as self-employed with HMRC within 3 months. You will be asked to pay class 2 national insurance by direct debit (sometimes called "the stamp"). This is compulsory and, from your point of view, counts for getting state pension etc. They are a set amount ( you can only be let off paying them if your earnings are very low)

3) you will get an annual self assessment form to return your profits on. Based on these profits, you will be liable to pay income tax and class 4 national insurance contributions. The latter are paid by the self-employed only and are basically just an additional tax since they do not count when working out any state benefits. Tax is due on 31 Jan after end of tax year, with payments on account of the following tax year on 31 Jan and 31 July.

4) CIS - there are special rules over and above all this for those who are self-employed in the building industry. If you cannot qualify to be paid gross, then the contractor has to withhold amounts from every payment he makes you and these are credited in due course against the tax liability I refer to at 3 above.

What costs you can claim - well anything which is wholly & exclusively for the purposes of the business e.g. tools & equipment, protective clothing, travel costs, materials and so on.

You may find it easier when first starting out to use an accountant just to get yourself on the right track and then see if you feel you can "do it yourself" after that.

jamclock

Thankyou for your quick reply Murdina,

Based on these profits, you will be liable to pay income tax and class 4 national insurance contributions.

What would you class as profits though, say i earned X amount as wages each week over the year this is the profit I have to pay Tax and class 4 NI on less any deductibles. Also therefore my contractor would only deduct my tax and I would be liable for my class 4 contributions on top of my class 2 contributions at the end of the year?

chappers

As has been said if you sub-contract under the CIS scheme your contractor should deduct 20% at source to be set against your end of year tax return.

You pay £2.20 per week class 2 NI(changing in april to £2.30 I think) unless your earnings are under around £4.5K then you can apply for an exemption.


Class 4 NI is paid @ 8% on anything you earn between about £5K and £35k (profit, i'e income - allowable expenses)and then at 1% for any profits over that.

Both class 2 and class 4 must be paid where applicable on top of any class 1 you may pay from employment.

System

This gives all details re rates of various classes of National Insurance -

http://www.hmrc.gov.uk/rates/nic.htm

BTW if you are not already registered as self-employed when you start working for a contractor he is obliged to deduct tax at the rate of 30% whilst you wait for your registration to be processed and for HMRC to send you your 10 digit Unique Taxpayer reference number (UTR). Once you receive that number you give it to the contractor who contacts HMRC to verify you are registered and get permission to deduct tax at 20%.

When you complete your tax return at the end of the tax year you put the total amount of tax deducted by all the contractors you worked for on the self-employment page.