self employment tax

self employment tax

Making the move to self-employment carries a huge set of implications beyond those that you’ve probably already spent weeks mulling over (from job security to whether you’re going to work at home, rent an office or hotdesk somewhere); as well as doing whatever it is you do best, you suddenly have to start thinking about things like filing a self employed tax return or CIS tax return and taking care of your own accounts, which could lead to a healthy self employed tax rebate or a CIS tax rebate.

Self employment tax is a different beast to that of people who are working for someone else; responsibility for tax and National Insurance contributions suddenly lie with you, which (if you’ve never run a business before) can feel pretty serious. Of course, it’s only human to delay doing stuff that feels serious because it feels like any mistakes will have bigger consequences.

However, it’s inadvisable to delay signing up to submit your self employed tax return or CIS tax return, as you may end up being penalised by HMRC if you don’t let them know you’re self-employed as soon as possible. Boo!

So, self employment tax is a topic that is worth a little reading on.

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self employment tax

The different approaches to being self employed

Sole Traders: You run your business as an individual (but you can still employ other people). This is what most people understand as being ‘self-employed’. You keep all your business’ profits after paying self employment tax on them.

Partnerships: In a business partnership, you still work as self-employed individual but all partners share responsibility for the business. Profits are shared between partners, with each partner paying self employment tax on their share. All involved must submit a self employed tax return or CIS tax return, pay National Insurance and self employed tax etc, but a nominated partner must also submit a tax return for the partnership as a whole.
Limited Companies: Your salary and dividends are taken into account.

So what exactly does self employed tax involve? As a self-employed person, you’re responsible for submitting the following things to HMRC.

Self Assessment
National Insurance
PAYE (if you have people working for you!)

Finally, remember that in many cases at the end of a trading period many individuals are due a self employed tax rebate or a CIS tax rebate.

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self employed tax


1. Spread income tax payments among the family

Each member of your family who is able to work has a personal allowance (£9,440 for the financial year 2013/14).
So if you are earning in excess of the basic 20 per cent rate band for income tax, then rather than do (for example) your own books/invoicing/admin/appointments, you could employ your partner. Income up to £9,440 would be self employed tax free to him or her, and an allowable expense to you.

You would have to pay national insurance, but if they earn less than the lower limit (£149 per week) then none is payable, though of course no entitlement to certain state benefits is then being accrued, including for the state pension.

2. Don’t forget that the personal allowance continues into old age

Rather than one person holding the bulk of the income in retirement, perhaps at a 40 per cent rate, it makes sense to ensure that finances are arranged so that income is shared as far as possible.

This can be achieved by building up a state pension for your partner, and/or by making pension payments to build up a retirement pot. These contributions are taxed relievable at the marginal rate of the payer, while the fund cannot be accessed prior to age 55.

Furthermore, payments of up to £3,600 per year can be made irrespective of the level of earnings. So why not also pension any children who are helping out in the business?

3. Watch your cash - can you keep it self employed tax free?

If you are a higher rate tax payer, the pitiful interest in the bank will be decimated further. Use cash Isas, and gift any surplus funds in the name of your partner if (s)he is a lower tax payer, having first used up their cash Isa too.

Not everyone will wish to do this, especially if the funds might be needed for the business, as you would then depend upon your partner agreeing to gift the funds back to you.

4. Do not exceed £100,000 of income

For every £2 of income over £100,000, you will lose £1 of your personal allowance. So by £118,880 you will have lost £9,440 of self employed tax free income.

This will then have been taxed at 20 per cent, and the £18,880 over £100,000 will have been taxed at 40 per cent, meaning that your marginal rate of tax on this slice of income is 60%.

In addition to the ideas given above, you could top up your own pension. Although the maximum annual allowance is currently £50,000, you can use unused annual allowances going back three tax years to increase this amount. Making gift aid payments can also preserve your personal allowance.

5. Claim your expenses

You can offset the cost of running your business against income to reduce your taxable profit.
You can’t deduct non-business or personal costs so if you use a room in your home as an office for more than 25 hours a month, the simplified flat rate scheme may be easier than having to show which costs are business expenses. We can help you with all of this as part of our self employed tax return and CIS tax return service, and in many cases this is what makes the difference between a self employed tax bill, or a self employed tax rebate or a CIS tax rebate.

6. Insure yourself

One way to avoid tax is not to have an income. Most people see this as quite a drastic solution to the tax issue, and actively seek to avoid it becoming reality.

But the self-employed are very vulnerable to periods of unemployment, and do not get paid if they are unable to work through illness.

The solution is to insure yourself, as well as any other key persons that you employ who ensure the sustainability of the business, against this risk; the premiums do not get tax relief, but the payments are made tax free. Life cover is equally an essential product to have.

7. Maximise your self employed tax allowances

The forgotten tax allowance is capital gains tax. Each person has an annual capital gains tax allowance that can be reached before the gain is taxed; for the financial year 2013/14 this is £10,900.

So, theoretically, if you manage your financial affairs well, you can plan for a future where you – and your partner – could get £20,340 (in today’s terms) each year tax free (£9,440 from income tax personal allowance and £10,900 from CGT).

8. Use pension triviality rules

If the total value of an individual’s entire pension rights at, or later than, age 60 does not exceed 1 per cent of the Lifetime Allowance, it is possible to convert these rights into cash, and avoid buying an annuity.
For the financial year 2013/14, the total pension rights cannot exceed £15,000. So, if a higher tax rate self employed person were to make four annual pension contributions for a spouse, a total of £14,400 would have been paid on which he would get 40 per cent tax relief (£5,760).
The triviality level in 2010/11 will be £18,000, which represents five years contributions. At age 60 the spouse could obtain £3,600 tax free leaving a lump sum of £10,800.

If the spouse does not have an income in the year of taking pension benefits, then £9,440 of this is tax free, leaving £1,360 to be taxed at 20% = £272. So the £14,400 has actually cost £8,912 (£8,540 +£272), with £14,128 net being returned to the spouse. Clearly this ignores any growth in the fund, which would require monitoring and which may require part of the last contribution to be withheld.

9. Keep good records and make sure you save throughout the year

You must file a tax return by the 31 January following the end of the previous tax year (or 31 October if not filing online). If you miss the deadline, automatic penalties apply.

You will need good records so don’t neglect this. This is also the deadline for paying the balance of tax due but most self-employed people will also have to make payments on account towards the current year’s tax. Each payment is half of the tax due for the previous year. For example, for the tax year ending 5 April 2014 the first payment on account is due on 31 January 2014, along with the balance of tax due for the tax year 2012/13. The second payment on account is due on 31 July 2014. You must make sure that your cash flow planning takes this into account.

10. Finally, make a personal financial plan

Good forward planning can maximise successful financial and tax strategies.

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self employed tax

Very simple. If you have only recently gone through the process to register as a sole trader, or indeed if you have been registered for some time, our service is set up so that we can look after all of your affairs for you. By using our service you can relax in the knowledge that your main focus can then be entirely driven towards your work, taking care of business, and hopefully building up your work/ business profile. All of the technical tax related matters are done for you.

Each and every year we, as your tax agents, will compile and create your self employed tax return or your CIS tax return. And as an organisation that has at it's heart tax rebates for our clients, we will leave no potential stone unturned in our analysis of your situation and circumstances that could potentially lead to a self employed tax rebate or a CIS tax rebate.

All you need to do to register with us as a client is click on one of the claim now links on this page, fill out the short online form and then press send. It is as simple as that. From there we will register you as a client and from that point forward we will offer you full twelve month support with your very own appointed tax agent at an extremely low cost which in the vast majority of cases does not involve our clients actually paying us a penny of their own money. We simply deduct our fees from any resulting rebate. All of our work for you is initially done first with no payments made from you.If you need help initially to register as a sole trader however, simply follow our link to HMRC or if you prefer, just get in touch with us and we can guide you.

Take a look at our relevant pages for more info on our charges and specific services.

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Self Employed Tax Rebate.

CIS tax rebate.

CIS tax return.

Self Employed Tax Return.


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