To understand how to save on taxes as a self-employed person, you must know which taxes you are required to pay. Here is an overview of the most important tax categories that can be applied to self-employed people.
Income Tax
Regardless of whether you are a self-employed person, or an employee, everyone is obliged to pay income tax. This tax relates to the taxable profit made by a self-employed person (annual surplus). This is often the most important tax for the self-employed, as many company expenses can be deducted from income tax. If you can reduce your taxable profit, you reduce your tax liability. When filing for income tax, you will need to submit a Self Assessment form to HMRC.
National Insurance
National Insurance are taxes paid by workers and employers in the UK which fund state benefit programs. Benefits that are funded by National Insurance include the Basic State Pension, Widows benefits, Incapacity Benefits, Unemployment and Support Benefits, Maternity and Guardian’s allowance and Administrative costs. Regular workers contribute to National Insurance through PAYE which comes directly out of their paychecks, whereas the self-employed must contribute a fixed payment and then a second payment based on a percentage of net profit up to a particular threshold. Self-employed people are liable to pay Class 2 or Class 4 National Insurance. The Class 2 rate is applicable to those earning less than £6,025 per year, while Class 4 is applicable to those earning over £8,164 a year. You can file these taxes along with your Income tax in the Self Assessment form.
Value Added Tax (VAT)
As a self-employed person you may be required to pay VAT which you can then charge on goods and services you provide to others through your business. The standard rate for VAT is 20%, although there are some exceptions to this. Not all traders are liable to pay VAT because they run very small businesses – if your VAT taxable turnover is less than £85,000 during a 12 month period, you are not required to register for VAT. Registering for VAT can be done using form VAT1. VAT returns are submitted quarterly to HMRC. More information regarding VAT can be found at the gov.uk website.
Information Returns
As a self-employed person, it is your responsibility to submit supporting documents for all of your tax filings to the HMRC. They will then compare the documents you have supplied to the information on your tax returns to ensure that any and all payment transactions are properly accounted for.