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Income for the self employed
If you work for yourself then you are self-employed.

If you are self-employed then you have to pay Income Tax and National Insurance.

The type of National Insurance that you pay is different to someone who is employed.

Keeping simple books
If the turnover of your business is less than £15,000 then you do not need to produce detailed accounts for tax (the turnover is the amount you take in from customers).

You will need to provide details of your

  • Total turnover
  • Total business purchases and expenses
  • Net profit.

Keeping records in a book is a great help. You will need records to claim benefits and to work out your tax and National Insurance. If your turnover is less than £15,000 a simple record like the one below will be all you’ll need. Otherwise you should buy a purpose-made accounts ledger. They are on sale in most stationery shops.

Use a different column for:

Date Money coming in Money spent Notes

Under Notes write;

  • what the money was made from or spent on
  • who paid or received it
  • if a cheque was written, the cheque number.

Keep everything separate.

Example:

At the end of each month add up the amounts.

If your business has a high turnover you should think about using an accountant. You may also have to pay VAT.

Putting money aside
As a self-employed person you have to pay tax and National Insurance as well as any running costs. Put aside a proportion of everything you earn so you can pay your tax when it is due.

Paying tax
You will have to pay tax on the profit that you make.

To work out the profit you will need the total turnover (total amount received from customers) and the total allowed expenses.

  • Contact your local tax office for a list of the expenses that are allowed.

    Profit = Turnover – Expenses

To work out your tax

  • Work out your profit for the year (takings less expenses)
  • Deduct your personal allowance (contact your tax office if you don’t know this)
  • Then find 20% of the rest (as long as your income is below £37,400 above your allowance)

Example:

For some more practice with working out tax see Wages from an employer.

Paying National Insurance
As a self-employed person you should pay class 2 and class 4 National Insurance Contributions. If your earnings are below £5,075 a year you can apply for a certificate of exemption. This means you don’t have to pay National Insurance.

Above that amount you should pay £2.40 a week for class 2 contributions.
52 x 2.40 = £124.80 per year.

You should pay class 4 contributions equal to 8% of profits between £5,715 and £43,875.

For Example:
Profit £17,586
Take away threshold amount
£17,586 – £5,715 = £11,871

8% of £11,871 = £949.68

  • In this example you should pay £949.68 a year for class 4 National Insurance Contributions.
  • You pay £124.80 Class 2 contributions. (52 weeks x £2.40 = £124.80)

The total amount you pay for National Insurance is £949.68 + £124.80 = £1,074.48

Activity - finding 8%
To find a percentage if you don’t have a calculator click here.

Activity:
Find out how much class 4 National Insurance the following self-employed people should pay.


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