24 November 2017 : 
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Self-employment is an increasingly common way for people in the UK to earn an income. In fact, 4.6 million (15%) were self-employed last year – the highest percentage we’ve seen at any point in the last 40 years.

One of the main reasons that the number of self-employed has risen in recent years is that more people are staying in self-employment, which could be down to a lack of job opportunities following the economic downturn.

Or, for a more positive spin on things, it could be because people in the UK like the idea of being their own boss, or we’re such a creative and innovative country.

Whatever the reason you’re self-employed, it’s important to know how much tax you need to pay.

How much tax you need to pay

Assuming you earn more than the annual tax-free Personal Allowance, you’ll need to income tax whether you’re employed or self-employed.

The rules are broadly the same, with the only main difference being that those in self-employment pay tax on profit, not gross income.

If you’re net profit is below the Personal Allowance of £10,600 (for the 2015-16 tax year), you don’t have to pay any tax at all, but you do still need to complete a return?

You’ll pay 20% – the basic rate – on income anything over £10,600 up to £31,786. Once you pass that threshold, you become a higher rate tax payer, and will pay 40% on income between £31,786 and £150,000.

Should you be lucky enough to earn over £150,000, you’ll pay the additional rate – 45%.

How to cut your tax bill

Claim expenses

You can offset the cost of running your home against your business income. This applies whether you work from your business premises or from home. You can’t deduct personal costs, but things like gas and electricity, rent or mortgage, and telephone and broadband are all allowable expenses.

Don’t exceed £100,000 a year

For every £2 you earn over £100,000 a year, you lose £1 of your Personal Allowance. If you’re earning well in excess of the threshold, there’s not a lot you can do, but if your income is somewhere near it, you might be actually be better off reducing your income.

For example, if you earn £118,800, you’ll lose £9,440 of your Personal Allowance. This will be taxed at 20%, and the £18,800 over the threshold will be taxed at 40%, meaning you’re actually paying 60% on this income.

Use the marriage allowance

Introduced just this year, the Marriage Allowance allows you to transfer up to £1,060 of your Personal Allowance to your spouse, if you don’t need to use it all. Essentially, your Personal Allowance will fall to £9,540, and theirs will increase to £11,660. This can cut your tax bill by up to £212 a year.

You can apply for Marriage Allowance if your partner’s income is between £10,601 and £42,385, and you were both born after 6th April 1935.

Deduct car costs

As well as being able to deduct the cost of running your business premises or home, you can also claim car running costs. If the car you use for business is also your personal car, you can claim for a proportion of the costs, such as fuel, parking, repairs, and insurance.

Alternatively, you can claim a flat rate for mileage. The rates are 45p per mile for the first 10,000 miles, and 25p per mile thereafter. If you ride a motorbike, it’s 24p per mile.

Donate to charity

If you’re feeling generous, you might want to donate some of your hard-earned cash to charity. If and when you do, make a gift aid declaration and keep a copy on file. You’ll then be able to get up to 30% gross tax relief.

How to pay the tax you owe

The second main difference between paying tax as an employee and as self-employed is how you pay it.

If you’re employed, the tax you owe is automatically deducted from your salary, so the cash never actually reaches your bank account. However, the self-employed need to calculate and pay their own tax.

You will need to complete a tax return for the financial year that has just ended on 31st October for paper returns, and 31st January for online returns.

Don’t leave it until the last minute though because 31st January is also the payment deadline for what you owe from the previous year. Depending on how much you earn, you might have already had to make payments on account.

Jemma Porter - Image Jemma Porter - Signature
Jemma Porter is a news & research reporter for compareandsave.com. Having worked as a journalist on a number of personal finance websites; she now spends time researching and commenting on UK personal finance stories and investigating new ways to help our readers save money. For press inquiries, please visit our Media Centre.

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