The tax liabilities of self employment. This article provides an overiew of the self-employed tax liability situation as it applies to the UK. There are three direct forms of taxation for the self-employed person in the UK.
1) National Insurance. Every self employed person has to pay a monthly amount call national insurance contribution. This is usally arranged via a monthly direct debit through the bank. At present the amount is 2.10 GBP per week. This may not seem a lot, and it is not, but then the benefits, such as state pension, are not a lot either.
In addition to this there is a national insurance charge made on your annual chargeable profit. Chargeable profits in this instance is your annual profits, less your personal allowance at the current rate. Between the personal allowance amount and a set ceiling, which can change each year, you will be required to pay a national insurance surcharge, which at the time of writing is 7%.
2) Income Tax. A self employed person is required to complete and submit an Income tax every year. This form records your profits from all business and personal sources. In addition a self employed person has to submit the self-employed supplementery forms which will contain your business accounts. These forms, with information up to 5th April each year must reach the tax office by the 31st January the following year. Failure to keep to these time table and submit the for in time will incur a fine of 100 GBP and a 5% surcharge on the amount of tax due. Similarly if you
The taxable profits, when calculated, will form the basis for the tax payable. After deducting personal allowances tax rates range from 20% on the first band of income to a maximum of 40% at present for high income earners. This tax is payable in two halves and, if paid late will be subject to interest and penalties.
3) Value Added Tax. (VAT). Every self employed person who has a turnover in excess of around 60,000 GBP (check for latest registration limit at www.inlandrevenue.gov.uk) must be registered for vat, unless they are operating in an exempt or zero percent field. The above mentioned web site gives further details of these. Once registered you will have to charge an addition 17.5% VAT on anything or service you sell. For some services, such as the supply of certain energy, there is a reduced rate of 5% and other services on which the charge is 0%. For retail business shops there are special schemes and formulas to work out the VAT element of your sales (Output tax). Every quarter you are required to complete a VAT form 100 and return it to the VAT office together with the VAT due to them. Again there are penalties if these are submitted late. On this form you will account for the VAT you have charged customers (Output Tax), and be allowed to deduct the VAT on a lot of the items of expenditure you have incurred (Input Tax). The difference between the two is the amount of VAT that you will be required to pay to the government.
Full details of all of these rates and explanatory notes and information is available at www.hmrc.gov.uk/rates/it.htm