Self-employment: How much National Insurance do you pay when self-employed?

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Employees usually pay tax and National Insurance through PAYE. However, self-employed people have to work out and pay their own tax, usually every year through Self Assessment. Read on to find out more about the process of setting up as self-employed and how much National Insurance self-employed people have to pay.

How do you register as self-employed?

The Government website defines someone as self-employed “if they run their business for themselves and take responsibility for its success or failure”.

Many people decide to register as a sole trader when they set-up as self-employed.

However, people also decide to set up a business partnership or create a limited company, which are also forms of self-employment.

Mike Parkes, Technical Director at GoSimpleTax, the self-assessment tax software, told “If you decide to venture into self-employment and run your own business, you may need to register as a sole trader.

“This applies if you earn more than £1,000 in a financial year (i.e. April 6, 2020 to April 5, 2021); you claim Tax-Free Childcare and need to verify your self-employment; or you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits.

“To do this, you simply register for self-assessment, to ensure HMRC is aware of how you’re paying tax, and then you need to file a tax return every year.”

To register as a business partnership or a limited company, the process is different from registering as a sole trader.

More information on registering and paying tax under these business structures can be found on the Government website HERE.

How much National Insurance and income tax do you pay when self-employed?

When registering as a sole trader, you will need to pay Class 2 and Class 4 National Insurance as well as income tax.

The amount you pay for National Insurance and income tax will depend on your earnings.

You pay Class 2 National Insurance if your profits are £6,475 a year or more, which is £3.05 per week for the 2020/2021 tax year.

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You pay Class 4 National Insurance if your profits are £9,501 a year or more, which is nine percent on profits between £9,501 and £50,000.

Class 4 National Insurance is two percent on profits above £50,000.

Most self-employed people, such as sole traders, will pay National Insurance contributions through Self Assessment.

Mr Parkes added: “It’s important to be aware that when you become a sole trader you must pay income tax on your profits and Class 2 or Class 4 National Insurance, depending on your annual income.

“You must also register for VAT if your turnover is over £85,000 a year.

“2020 has been a year like no other and the future is unknown. As such, it’s important as a self-employed worker to keep an up-to-date record of your business sales and expenses and ensure you get your tax affairs in order which, in the long term, will provide you with a much clearer picture of your finances.

“The key is to firstly complete your 2019/20 tax return and submit it to HMRC as soon as possible.

“This will clarify the payments needed to be made on January 31, 2021 and July 31, 2021.

“You should also start to draft your 2020/21 tax return. Being the year adversely impacted by COVID-19, this will give you a good understanding of future tax liabilities allowing the maximum amount of time to prepare for payments.”

Many self-employed people choose to employ an accountant to help with sorting out tax payments.

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