Self-assessment tax returns (or personal tax returns as they are also referred to) are completed in order to inform HMRC how much tax you need to pay for the year and enables you to pay said tax. In general, only those who are self-employed will have to complete a self-assessment tax return because when you are employed by a company, your employer will automatically deduct the tax you owe and National Insurance from your salary as part of their payroll obligation. When you are self-employed however, you are the one who is responsible for ensuring you pay tax and National Insurance on the profits you earn. In some instances, you may still have to complete a personal tax return even if you are employed such as when you earn additional income. Examples of this include:
- You own rental property. This can include property which you let out short or long term, holiday homes or homes let out on Airbnb.
- You make profit by selling stocks, shares or bonds
- You earn some extra money on the side to your normal job through a hobby such as selling homemade items or providing music lessons
- You sell other items which make a profit such as collectibles or antiques
What do I need to do first for a self-assessment tax return?
One of the most important steps to completing a personal tax return is to register as self-employed with HMRC. Ideally, you should inform them as soon as you become self-employed, but you are required to do so no later than 5 October after the end of the tax year in which you became self-employed. If you start your own business in December 2018, then you would need to register by 5 October 2019.
By registering for self-assessment, you will receive a UTR (unique taxpayer reference) number. This will be a 10 digit code that is unique to you which you’ll need to use to manage your tax. If you have any questions or problems related to your UTR, you can find the answer on our UTR FAQ page.
How do I calculate my income tax if I’m self-employed?
Completing a self-assessment tax return will require you to calculate the tax you owe to HMRC for your own earnings. When you are self-employed, it is important to remember that you only pay income tax on your profits. To work out profit you simply need to deduct your business expenses from your total income. It is for this reason that it is essential to keep accurate records of your spending and earning. Should you run a business where there are lots of transactions to keep up with, you may want to consider using a bookkeeping service. The amount of tax you need to pay on your profit as a self-employed person is the same as if you were employed. The percentage is split out in different income bands:
- Basic rate: 20% on income between £12,501 and £50,000 for the tax year 2020/21
- Higher rate: 40% on income between £50,001 to £150,000 for the tax year 2020/21
- Additional rate: 45% on income over £150,000 for the tax year 2020/21
Don’t forget that everyone is entitled to the standard personal allowance of £12,500 which means you can earn up to this much in profit tax free. For anyone earning over £100,000, the personal allowance is reduced by £1 for everyone £2 of income over the threshold.
The rates are applied to your profit within the brackets, so this means if you earning £65,000 in the tax year 2019/20 you would pay no tax on £12,500; you would need to pay tax of 20% on the amount from £12,501 – £50,000 (£37,500); and 40% tax on the remainder amount of £14,999. In total you would have to pay 13,500 tax on £65,000 income.
How much National Insurance do I need to pay if I’m self-employed?
For those self-employed earning at least £6,475 in profit in the tax year 2020/21, you will need to pay Class 2 NIC (National Insurance Contributions). This is £3.05 per week. For those whose profits are £9,500 or more (for the same 2020/21 tax year), you will also pay Class 4 NIC and that is 9% on profits between £9,501 and £50,000 and 2% on anything above this.
Class 2 NIC has been in the political spotlight with debates as to whether or not it should be removed.
Where can I find help for completing my self-assessment tax return?
Take a look at our Self-Assessment Tax Return service page.