Tax and NI for self-employment

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
I have been asked various questions about tax and NI by a friend who has recently gone self-employed but as I haven't done personal tax I am struggling to give him the right advice.<BR><BR>Can anyone help me please?<BR><BR>I have been doing some reading on the Inland Revenue website and it seems to say that:<BR><BR>For self-employed people NI is paid at a flat rate of £2.10 per week either monthly or quarterly (Class 2 NI). The remainder (Class 4 NI) is calculated at the end of the tax year and included in the tax return. Is this right??<BR><BR>As for tax, he is confused as to when he pays tax. Am I right in thinking that as he only started working in this tax year ('05-'06) he will receive as tax return at the end of the tax year (April '06), he will have to complete it and return it by the deadline of September '06. His tax will be calculated by IR by January '07 when he will then pay his first installment of three? So he won't actually pay any tax for this year until January 2007??? This seems so far away, is this right?? Or will he have to pay some tax for this year before the end of this tax year (bearing in mind that the year won't have ended so how will he know what he has earnt?!)<BR><BR>Also as he pays rent for his self-employment can he off-set it against his income? Does self-employment work the same way as having his own business? This is really confusing?!<BR><BR>Can someone just tell me if this is all correct so I don't give him bad advice.<BR><BR>Thanks,<BR>Sarah.

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    Tax and NI for self-employment

    Hi<BR><BR>What you have said about national insurance and the tax timetable is correct. He wont pay any tax or his class 4 NI until Jan 07. This would be the whole amount. After that he would pay on account which is approx half of that amount in July 07 and the balacing amount of tax due for his next financial year in Jan 08. Hope that made sense. <BR><BR>But I would advise him to put a amount away each month, some people seem to think that because it seems a long way off they wont bother yet and get into trouble nearer the time. <BR><BR>On the self assessment form there is a section which helps you calculate the class 4 and this is added on the tax payable, currently I think it stands at 8% of business profits. Class 2 is normally taken by direct debit each month.<BR><BR>As for his rent, can you give a bit more information on this and his line of work and I will try and help you. <BR><BR>Self employment is the same as having your own sole trader business. <BR><BR>If you want you can email me directly on vickythorn@aol.com<BR><BR><BR><BR>
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Tax and NI for self-employment

    he would also pay 50% poa in jan o7 the second payment being made in july 07. then this would be deducted from what was owed in the following tax year but you would be paying 50 % of the previous year in advance again!<BR><BR>hope that hasnt confused you.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Tax and NI for self-employment

    Thanks very much for that! I'm a little less confused now.<BR><BR>Trinity - I've emailed you about the rent.<BR><BR>Thanks, Sarah.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Tax and NI for self-employment

    No I'm confused again now!<BR><BR>Which was round is it?<BR><BR>Trinity - your message seems to say he'd pay the whole lot in January '07, then half p.o.a in July '07, half p.o.a January '08 for the next tax year.<BR><BR>Tigercat - your message seems to say he'd pay the whole lot in January '07 plus 50% p.o.a for next tax year, then the other 50% in July '07. So 100% and 50% in January '07??<BR><BR>Who's right please?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Tax and NI for self-employment

    Hi<BR><BR>Yes tigercat may be right. Think I'm getting myself confused now.<BR><BR>*Receive Self assessment in April 06 for 05/06<BR><BR>*If you want them to calculate it, return by Sept 06<BR><BR>*Pay 05/06 tax in Jan 07 plus an extra 50% of this amount for payments on account towards 06/07 tax bill<BR><BR>*Pay another 50% in July 07 on account<BR><BR>*Pay 06/07 tax bill minus the two payments on account in Jan 08.<BR><BR>* and so on each Jan and July<BR><BR>The above should be correct, i think.<BR><BR>Good Luck
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Tax and NI for self-employment

    Thank you both! I don't think he'll be a happy bunny when I tell him?! I know I wouldn't be. He'd better get saving now!<BR><BR>Sarah.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Tax and NI for self-employment

    hi yes it definelty the lot and first poa for the next year as i had to do that this jaubary, ouch, then july was ok, but then next jan i will have the bal to pay plus the 50% of whatever this years bill was!!<BR><BR>it is advisable to try to put a certain amount away each week/month.<BR><BR>
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Tax and NI for self-employment

    Oh god what a nightmare! I'd hate to be self-employed?!<BR><BR>Thanks!
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Tax and NI for self-employment

    self employed is wonderful re tax - only have to pay twice a year not every month, and you can legitimately off-set various things against tax - i reckon i pay only about 50 - 75% of what i would pay under PAYE.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Tax and NI for self-employment

    Really? So there are benefits to being self-employed? Can't wait to start studying it in Sept. It sounds a really interesting subject that I would benefit from in the future.

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