This article is the latest summary of tax rates and other key changes affecting the self employed in the new tax year starting from 06 April 2020.
Any person working for him or herself in the business is classed as self-employed or sole trader and is required to file a self assessment. Self employment is an unincorporated form of business which does not require company registration with Companies House.
Business Registration
You should register with HMRC for self assessment as a self employed business. Registration for self employment is compulsory for all self employed individuals even if you are an existing tax return filer.
Business Records and Accounting
As a self employed business person, you would record your income and business expenses for accounting purposes. Allowable business expenses may include cost of sales (purchases), office rent, travel costs, admin such as printing, marketing, telephone and internet. Each business is unique and so are its expenses. File Digital can help you assess which business expenses can be claimed in your Annual Accounts to minimise the tax liability.
Accounts and Self Assessment
Self Employment accounts are usually prepared for the same period as tax year i.e 6th April to 5th April every year. Current tax year is 2020/21 starting from 6th April 2020 and ending on 5th April 2021. As a self employed business, you are required to complete a self assessment for each tax year. Depending on the nature of your business, you may be required to complete different sections of self assessment tax return.
All sole traders fill in the main section of self-assessment (SA100) and provide additional information on supplementary pages such as SA102 for employment, and SA105 for property. The main section SA100 can be filled in using the figures calculated in your Annual Accounts. Primarily, it requires figures for sales, business expenses and capital expenditure.
Short Self Assessment
HMRC allows self employed businesses with profits under the compulsory VAT registration threshold to submit a shorter version of Self Assessment. SA103S can be filled in with the total of your sales and expenses figures in respective boxes instead of the full breakdown of expenses under relevant categories.
Tax Liability
Tax liability on your self employment profits are calculated after deducting the personal allowance. Current personal allowance for 2020/21 or PA is set as £12,500.
How much Tax?
Self employed will be taxed at the following rates for 2020/21:
Tax rates for Scotland and Wales can be different and File Digital recommends checking these on GOV.uk.
NI Contributions
In addition to the Income Tax, self employed also make national insurance contributions. There are two types classes of NI contribution paid by the self employed.
Class 2
For self employment profits exceeding £6,475 a year, class 2 National Insurance rate is £3.05 per week. Class 2 contributions are paid in addition to the income tax via self assessment tax return.
Class 4
For self employment profits exceeding £9,501 a year, class 4 National Insurance rate are:
9% on profits between £9,501 and £50,000 plus
2% on profits over £50,000
Class 4 contributions are paid in addition to the income tax via self assessment tax return.
Self Assessment Filing Deadlines
Following are the key deadlines for the tax year 2020/21:
Paper self assessment return - to be filed by 31st October 2021
Online self assessment return - to be filed by 31st January 2022
Income Tax, Class 2 and Class 4 National Insurance payment - due by 31st January 2022
Payments on account - due by 31st July 2022
