A friendly guide to personal tax for the self-employed and high earners

As a Money Dashboard user, you already know the benefits of good financial health. Managing your money and staying in control of your finances is so important not only to be able to save for the future, but for your mental health as well. Unfortunately, taxes are a sticking point that, here in the UK, we struggle to overcome. 

A Deloitte survey found that almost 80% of us feel that we don’t know enough about personal tax. It’s boring, complicated and can be super-pricey when you don’t know what you’re doing. That’s where we come in. At TaxScouts, we’re tech geeks. We let our tech do the boring, time-consuming admin so that we can bring you a simple, quick and low-cost service. Our customer support team is made of real humans who can answer your real-life questions, whenever you need us. 

We’ve partnered with the team at Money Dashboard to offer you a 10% discount on our personal tax return service meaning we’ll handle it all for you for only £107! To take advantage of the deal, simply click here

To get you started though, here’s a quick rundown of the basics.

I’m a self-employed worker

When you’re self-employed, your tax liabilities can be a minefield. Unlike when you’re employed, you have to declare your earnings to HMRC and pay your tax bill yourself. 

How do I declare?

You declare your income by completing a Self Assessment - and this can be done online via HMRC. 

Once you’ve done this, HMRC will send you a Unique Taxpayer Reference (UTR) number which you’ll use to pay your tax bill. And in case you weren’t aware, your tax bill is known as your tax return. 

Some key dates to get in the calendar

  • The tax year - 6th April - 5th April 
  • Deadline to register for Self Assessment - 5th October
  • Deadline to pay your tax bill - 31st January
  • Payment on Account (when the second half of your tax bill is due) - 31st July

What tax do I pay?

Whether you’re employed or self-employed, there are two types of tax that you’ll be liable to pay:

  1. Income Tax
  2. National Insurance

Income Tax is calculated based on what you earn. As with most things, the more you earn, the more you’ll owe. And the rates of Income Tax tend to change every tax year. Here are the 2020/21 Income Tax rates:

2020/21 Income Tax rates


National Insurance is also calculated based on your earnings, but it works a little differently. By paying National Insurance, you become eligible for certain state-provided benefits such as:

  • State pension
  • Disability benefit
  • The Maternity Allowance

But this is where things vary for the employed versus self-employed workforce. There are five types (known as classes) of National Insurance. When you’re self-employed, you have to pay Class 2 and Class 4, making you eligible for the state pension, the Maternity Allowance, the Employment and Support Allowance and more. You can also make voluntary contributions to other classes of National Insurance to be eligible for benefits like the Jobseeker’s Allowance. 

  • Class 2 National Insurance - a flat rate of £159 per year when you earn more than £6,475 a year
  • Class 4 National Insurance  - 9% of your earnings when you earn more than £9,501 per year

Expenses

HMRC allows you to deduct your expenses from your overall income when you calculate your tax bill. Any spend that you make that is wholly, exclusively and necessarily for your business can be deducted. This includes but is not limited to:

  • Business travel and mileage
  • Accounting costs
  • Marketing costs
  • Equipment 
  • Specialised uniform
  • Laptop, computer, work phone
  • Office rent

Make sure that you’re organised when it comes to your income and expenses. We’d recommend keeping a record of your monthly business finances in a spreadsheet or a similar tool. That way, when it comes to doing your tax return, you’ll have all the documents you need in one place.

I earn over £100k

When you earn over £100,000, you’re classed as a high earner. HMRC will, therefore, want to take a look at your finances - and for this to happen, you’ll need to file a tax return.

The deadlines to register for Self Assessment and to pay your bill are the same as they are when you’re self-employed, but the requirements are slightly different. 

You’ll need to do a tax return whether you’re employed or self-employed, and it’s so that HMRC can calculate your Adjusted Net Income.

What’s Adjusted Net Income?

This is your total taxable income, not including any tax reliefs that you claim.

It’s important because when you earn more than £100,000, your tax-free Personal Allowance - which is automatically £12,500 per year - is gradually removed. And this raises your Adjusted Net Income. 

Your tax-free allowance goes down by £1 for every £2 that you earn over £100,000, which means that by the time that you’re earning £125,000, none of your earnings are eligible to be tax-free. 

HMRC, therefore, looks into your earnings to make sure you’re paying enough tax by asking high earners to file a tax return. 

Self-employed vs. employed - how is it different?

If you’re employed and a high earner, your taxes will be mostly sorted by your employer. You still have to file a tax return but the tax bill that you pay will not include Income Tax and National Insurance, which you’ll already have paid from your PAYE salary.

When you’re self-employed, you’ll be responsible for paying all the tax you owe via your tax return. Check out our advice above to see what steps you need to take.

Ready to get started?

If this all sounds like more than you have the headspace for, don’t worry. 

We can help you at TaxScouts in just 3 easy steps:

  1. Signup here
  2. Get matched with a certified accountant (at a 10% Money Dashboard discount!)
  3. Provide us with some information around your income and expenses (we’ll tell you exactly what we need)

And we'll do the rest!

Disclaimer

All content is for informational purposes only and is the opinion of the author. Nothing on this website should be interpreted as "advice". Money Dashboard Ltd make no representations as to the accuracy, completeness, suitability or validity of any information on this site and will not be liable for any errors or omissions or any damages arising from its display or use.

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