Tax 101 for the self-employed

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The Autumn Statement - 17 November 2022

The Chancellors Autumn statement sets out this government’s plans to tackling some key issues, including inflation, the price of energy and the precarious state of the UK’s finances. This is the third and final budget event this year, following the Spring statement earlier this year and the much maligned and now largely reversed mini-budget from 23rd September.

Tax thresholds frozen

The personal allowance (i.e. the amount an individual needs to earn before they’re subject to income tax) has been frozen at £12,570 until April 2028. Likewise, both the basic and higher rate threshold and the main national insurance thresholds will also be frozen until that date. However, the threshold for when the highest earners start paying the top rate of income tax will be brought down from £150,000 to £125,140

Increase in the amount of tax by the most well paid

As above, the additional rate (i.e. the threshold for when high earners begin paying the top rate of tax) will be lowered from £150,000 to £125,140 from 6 April 2023.

National insurance and inheritance tax

Both national insurance and inheritance tax thresholds will both be frozen for another two years, until April 2028.

Dividend allowance and capital gains tax

The Dividend Allowance will be cut from £2,000 to £1,000 next year and then to £500 from April 2024, while the Annual Exempt Amount for capital gains tax will be cut from £12,300 to £6,000 next year and then to £3,000 from April 2024.

Reforms to Research and Development (R&D) tax reliefs

Following reports of widespread abuse of the R&D tax relief scheme, the government have announced that they will cut to the deduction and credit rates for the SME scheme. The deduction rate will be lowered from 130% to 86% while the SME credit rate from 14.5% to 10% but increase the rate of the separate R&D expenditure credit from 13% to 20%.

In this guide, we are focusing on your employment status for tax purposes. IR35 is legislation that was introduced to recoup tax revenue that is lost when freelancers and the self-employed fail to register as employees of another business. The HMRC can take a dim view of parties who fall foul of this legislation and they have the right to investigate and penalise freelancers and the self-employed as well as the companies they work for.

How do I know if I'm self-employed?

Often, the lines between being self-employed and an employee can be blurred. As such there’s no hard and fast definition of what makes someone self-employed. It’s more of a balancing act, tip the scales too far and HMRC may take the view that you’re an employee.

There are some general rules of thumb to help you determine whether you will qualify as self-employed:

  • Your right to appoint a substitute: If you have agreed to work for a client but you have the right to send someone else to carry it out in your place.

  • Being able to work for others: Unlike traditional employee/employer relationships that insist on exclusivity, self-employed individuals can work for as many clients as they want (just make sure this doesn’t lead to a deterioration in your services).

  • Equipment: An employee would expect their employer to provide all the equipment they needed to perform their role. On the other hand, a self-employed individual would be expected to provide much of their own kit.

  • Responsibility: A self-employed individual may be expected to take responsibility for their work and if necessary, make good any mistakes or errors at no additional cost.

If you’re still unsure, the HMRC have put this tool together to help you check your employment status for tax purposes.

How do I register as self-employed?

First and foremost, you must register with HMRC. The deadline for doing so is the 05 October following the end of the tax year. In other words, the 05 October in your business’s second tax year.

Your self-employed income is subject to tax and national insurance contributions (NIC), but crucially, no deductions of this type will have been made before this income is paid to you. As such, it’s up to you to report and make the necessary payments to HMRC, this is what’s known as self-assessment.

N.B. There are penalties and late-payment interest charged for businesses that fail to register on time. So you should make this a priority. If you’re a new business registering for the first time, you can do so online, by post or over the phone

You might also need to consider whether you will need to register for VAT (Value Added Tax). See our VAT guide for more information.

What happens after I register?

Your registration lets the HMRC know to issue you with a notice to complete a self-assessment tax return. This notification should be received shortly after the end of the tax year (April 5) either by post or electronically, depending on how you registered.

Likewise, your return may also be completed online via the HMRC, through the post with paper forms or by using a third party, like a tax accountant or a commercial software solution.

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