Tax Glossary


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Last updated on:
March 17, 2024

Being self-employed in the UK means running your own business as an individual. You're not employed by someone else, and your income isn't taxed at source. Instead, you must manage your own tax affairs, including paying Income Tax and National Insurance Contributions (NICs) through the Self Assessment tax system.

Types of Self-Employment

You can structure your self-employment in mainly two ways:

  1. Sole Trader: This is the simplest form, where you and your business are legally the same entity. It's easy to set up and requires less paperwork. As a sole trader, you keep all your business's profits after tax but are personally responsible for any losses your business makes.
  2. Limited Company: Operating through a limited company means your business is a separate legal entity from you. This structure offers limited liability protection, meaning your personal assets are protected if the business runs into financial trouble. Profits are taxed differently, often allowing for more tax-efficient income extraction methods, such as paying yourself a combination of salary and dividends.

Important Considerations for the Self-Employed

  • Self-Assessment Tax Returns: You're responsible for calculating and paying your taxes. Each year, you must file a Self Assessment tax return detailing your business income and expenses.
  • National Insurance: As a self-employed individual, you'll pay Class 2 and Class 4 National Insurance contributions, depending on your profits.
  • Trading Allowance: The first £1,000 of income from self-employment is tax-free, known as the trading allowance. If you earn less than this, you may not need to file a tax return.
  • VAT Registration: If your turnover exceeds the VAT threshold (£85,000 as of my last update), you must register for VAT and charge it on your goods or services.
  • Record Keeping: It's essential to keep detailed records of your income, expenses, and any tax payments, as HMRC may request to see these if they decide to investigate your tax affairs.

Choosing between being a sole trader and setting up a limited company depends on various factors, including the size of your business, your income, and how you wish to manage your tax liabilities. It's often beneficial to seek advice from an accountant or financial advisor to determine the best structure for your business.

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