Over four million Brits were working in a way that was classed as self-employed in 2017. It’s a very common way of working in places like Middlesex and Greater London, where there’s an easily-accessible and diverse client base nearby. From the power to determine your own hours of work to the ease with which you can take a day off, it’s easy to see why self-employment is so popular. But it also means that a significant chunk of people must manage their own tax affairs, and that’s a part of the phenomenon that’s less simple to deal with. From getting to grips with payment on account to ensuring that you have enough cash left over to pay the HMRC bill in a few months’ time, there are lots of things to consider.
Payment on account
The payment on account, as it is known, is designed to reduce the burden of the following year’s tax bill and to make it a little easier to manage the constant stream of self-regulated savings and payments. The amount you’ll need to pay on account is 50% of last year’s tax bill. If you’ve already paid 80% of your due tax for some reason or your last self-assessment tax bill was under £1,000, though, you won’t have to pay on account.
Saving up – and staying legal
When working as a contractor, your regular wages will probably at first seem a little high – and while that’s great on the face of it, it’s important to be prudent rather than spend it all at once. After all, you’ll need to set aside a significant sum from this amount in order to pay your tax at the end of the financial year. For basic rate taxpayers, it’s often advisable to set aside around 30% of your income in order to pay your tax bill further down the line – although this can vary depending on your exact financial circumstances, so you should speak to an accountant if you have any problems. An umbrella company can also assist if you need help with IR35: this is a regulation which governs some client-contractor relationships, so it’s important to seek professional advice if you think you might need it.
On top of any income tax, student loan repayments and other obligations, you’ll also have to factor in National Insurance (NI). The rates payable here can be slightly different to those paid by people in regular employment and they’re also subject to fluctuating government budgets and political priorities, so relying on the figures which applied in any previous job isn’t wise. Currently, if your profits are over £6,205 or more per year then you’ll pay £2.95 a week in Class 2 contributions, and if your profits are more than £8,424 or more per year then you’ll pay 9% between £8,424 and £46,350 – and 2% on profits above that ceiling.
Being self-employed is a great way to enjoy the sort of flexibility and freedom which isn’t offered by traditional regular employment. It comes with its pitfalls, though, and being fully responsible for your own tax affairs is certainly one of them. But by saving up, staying on top of the latest figures and making sure you understand concepts like payment on account, you’ll be more likely to enjoy a worry-free self-employment experience.