Knowing exactly how much you can expect to pay in income tax, and how to sort out your tax affairs may seem a little daunting, but with the right guidance from a tax accountant, you can successfully navigate your way through your tax affairs with minimal hassle.
If you’ve recently started a business, it’s likely you have plenty of questions surrounding tax that you would like to have answered. In this article, we’ll answer three of the most frequently asked questions self-employed people have about income tax to help further your understanding of this - sometimes confusing - subject. Here’s what you need to know about income tax for the self-employed:
1. Do you pay less tax if you are self-employed?
If you’re self-employed, you will not pay less income tax than an employed person. This is because the tax-free allowance, which covers the amount you’re allowed to earn before paying tax, is the same, whether you are employed or self-employed. At the time of writing, the tax-free allowance is £12,500. This means you can earn up to £12,500 before starting to pay income tax on your earnings. This figure will rise to £12,570 for the 2021 - 2022 tax year.
As someone who is self-employed, the amount of income tax you pay will be based on how much profit you have earned throughout the tax year, rather than your total self-employed income. Income tax bands are set as 0%, 20%, 40% and 45% of your trading profits as follows:
0% income tax to pay on trading profits of up to £12,570 (for the tax year 2021 - 2022).
20% basic rate income tax to pay on trading profits from £12,571 and £50,270 (for the tax year 2021 -2022).
0% higher rate income tax to pay on trading profits from £50.271 and £150,000 (for the tax year 2021 - 2022).
45% additional rate income tax to pay on trading profits over £150,000 (for the tax year 2021 -2022).
2. How do self-employed people file an income tax return?
Once you decide to become self-employed, you need to inform HMRC by registering as self-employed. When you become self-employed, you will be required to submit an income tax return every year, which is known as a Self-Assessment tax return. Most people choose to submit their tax returns online, but paper-based tax returns are still available.
Your Self-Assessment tax return will cover your total income and expenses for the previous year. If you plan to submit your tax return online for the 2020 - 2021 tax year, you will need to ensure it is completed and submitted by 31st January 2022.
If you are submitting your tax return on paper, you will need to submit it by 31st October 2021.
You can choose to either file your tax return yourself, or you can enlist the help of an accountant to submit it on your behalf if you prefer. If your business is a limited company, and you pay yourself through dividends, your tax return could be a little more complicated. You may find it useful to find a tax accountant to offer you guidance when completing your tax return and to provide tax planning advice.
3. How can I reduce my self-assessment tax bill?
Your final tax bill for the year will be calculated based on your trading profits rather than your total income. But the tax you pay will be based on your trading profits minus any allowable expenditure.
There are a range of different expenses that are eligible for deduction from your taxable profits and which can be used to reduce the amount of taxable income and therefore reduce your tax bill. Tax allowable expenses include donations to charity, repayments for loans, pension contributions, and business expenses such as equipment and rent.
If you have any questions about income tax for the self-employed and would like to know more, get in touch with us today for a no obligation chat. Find out how we can help advise you on your income tax self-assessment by calling us on +44 1322555442 or email us at email@example.com to discuss your accounting needs.