Over the past few years, many skilled professionals have wanted to ply their trade with more independence and control over who they work for and how leading to a boom in self-employment registrations working with a tax accountant to understand what they owe.
The category of self-employment is broad and includes not only people who own their own business, but also freelancers, contractors, sole traders and people with side-businesses that make more annual revenue than the acceptable trading allowance of £1000.
However, the one change when moving away from PAYE is that you need to organise and pay your taxes, which is currently undertaken through the self-assessment system.
The amount of tax you need to pay will depend on your earnings, and whilst the registering of this information is different to that of an employee, you have the same tax bands and personal allowance.
The banding system means that any money between the banded amount is taxed at a particular rate, and if any more money is earned on top of the banded amount it is charged at the higher rate.
There are currently four tax bands for income tax:
- Personal Allowance: Typically any amount earned up to £12,570 is untaxed, meaning that the first £12,570 you earn will not have any money deducted from it.
- Basic Rate: After this £12,570, any amount from this to £50,270 will be taxed at a rate of 20 per cent.
- Higher Rate: Above £50,271, any money earned up to £150,000 will be taxed at a rate of 40 per cent.
- Additional Rate: Any money earned over £150,000 will be charged at 45 per cent.
What is important to know is that this works in stages.
This means, for example, if you earn £55,000 per year, you would pay nothing on the first 12,570, pay 20 per cent of the next £37,700 (for a total of £7540 payable in tax), and then the remaining £4730 is paid at the 40 per cent rate (£1892).
This means that in total in this example, £9432 would be owed in income tax, although there are also allowable expenses that can be used to deduct tax, such as tools needed to complete the job, travel expenses, simplified expenses and accounting fees.
Still, it is always worth consulting with your accountant if you have questions.