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Tax Implications of Self-Employment

By: J.A.J Aaronson - Updated: 3 Oct 2014 | comments*Discuss
Self Employed Tax Self Employed Finance

Self employment has a number of significant advantages. In many cases, self employed individuals can choose their own hours, choose their place of work, and avoid the potential difficulties of working for an undesirable boss. However, these benefits are mitigated by significant added responsibilities associated with self employed finance. Primary amongst these responsibilities is adherence to the somewhat onerous self employed tax regime.

Most employees are now paid through the Pay As You Earn, or PAYE, system. Income tax and relevant National Insurance contributions are deducted at source, meaning that they are simply taken from the employee’s pay packet with no further action required. If you are self employed, however, PAYE is unlikely to apply to you. Instead, you will be required to complete the self assessment process, designed for the collection of self employed tax. The major potential exception to this is when you are a director of a limited company; in these cases, you will probably have to be paid by the company via PAYE.


One of the first steps if you choose to become self employed should be to register your new employment status with the HM Revenue and Customs (HMRC). This should be a priority; from the end of your first month of self employment you have three months to register before you risk incurring a penalty. Specifically, if you fail to notify HMRC of a new Class 2 National Insurance Contributions (NICs) liability in time, you may be forced to pay a £100 penalty.

Once you become self employed, the way in which you pay both income tax and NICs will change. You will probably be required to pay two different classes of NIC; unless your earnings are below around £5,885, you will pay flat rate Class 2 NICs of £2.75 per week, as well as Class 4 NICs on profits between £7,956 and £41,865 and 1% on any income above that upper threshold. National Insurance Contributions paid by employees count towards the full range of social securities made available by the government. Class 2 NICs, however, will not count towards Job seeker’s Allowance, Statutory Sick Pay, or the additional State Pension. It is particularly important, therefore, for self employed individuals to consider contributing to a private pension fund.

Self Assessment

After registering to pay self employed tax, you will receive a self assessment form every April. The size of this form will depend on your earnings and the complexity of your affairs; it will be either four or ten pages long. The form will require you to give details of all of your earnings throughout the year, as well as any expenses or deductions that you are claiming. This form must be returned by 31st January in order to avoid a late return penalty. If you return it by 30th September, your liability will be calculated by HMRC on your behalf.

As can be seen, it is vitally important for any self employed individual to keep efficient records of all of their income and outgoings. If you do not keep proper accounts you will be unable to properly complete your self assessment, and will thus risk penalty for non-disclosure, or risk paying more tax than you should. Further information on record keeping, self employed finance and self employed tax is available in articles elsewhere on this site.

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