How to Calculate Self-Employment Tax in the UK

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Self-employment in the UK is a tricky prospect when it comes to your tax affairs. If you were a normal employee, your tax would be taken out of your salary automatically. Sadly, the self-employed have to deal with this by themselves. Calculating tax for the first time can cause you a lot of headaches. In this article, we’re going to show you how to go about calculating self-employment tax and how to make sure you don’t fall foul of the rules set down by HMRC.

Start with the Easy Part

The easiest way to go about calculating your tax is to use specialised tax calculators. There are calculators you can find online. They will perform the final sums so you know exactly what you have to pay. All you have to do is enter the required figures and it will do the rest of the work for you. Alternatively, employ an accountant and they will do this part for you.

Either way, make sure you perform due diligence. You don’t want to pick up the wrong calculator or the wrong accountant.

Figure Out Your Income

This is where people who organise their finances will really start to gain an advantage. Go through all your invoices and all your receipts to figure out how much you brought into your business in the last financial year. Focus only on what you earned. Ignore anything you spent for now. Your income will go down as your gross revenue for the financial year.

What Did You Spend?

The second step is to work out how much you spent. This is where you can start to take into account business expenses. Most self-employed people find this the most difficult step in the process. You have everything that appears on an invoice, but what you may not have is all the hidden expenses that come with running a business.

HMRC allows you to claim a significant number of business expenses in the UK. Some of these expenses you can claim back include:

  •          Office rent
  •          Equipment costs
  •          Utility bills for your office

We recommend visiting an accountant who can help you with claiming back on your expenses. They will know what you can claim and what you can’t claim. HMRC are cracking down on frivolous business expenses claims. Make sure that you don’t give them a reason to audit you, or they could come back for what they feel they’re truly owed.

Calculating Your Profit

Now that you have your income and your expenses, you should take away your expenses from your income to calculate exactly how much profit you made that year. This will influence how much you pay in terms of any corporation or capital gains taxes.

Once you have figured out what you need to pay based on your income bracket, you need to set something aside for national insurance payments. Most people will pay national insurance payments on an annual basis when they’re self-employed.

What if I’m Unsure?

If you aren’t sure how much you need to pay, or you’re having problems calculating your self-employment taxes, get in touch with HMRC. They’re there to help you. A call to their helpline will put you in contact with an expert who can guide you through the process of paying your taxes. Contrary to popular belief, they aren’t there to squeeze you for as much as possible. If you’re willing to work with them, they will do what they can to make sure you escape any financial penalties.

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Overall, the key to calculating your taxes is to prepare far in advance. Keep accurate financial records of everything going out and coming in.