Tax for the self-employed Self-employed National Insurance

The self-employed pay National Insurance at a special rate

If you're self-employed, it's not just income tax you need to pay on your profits. You also have to make National Insurance contributions. 

Building up National Insurance contribution entitles you to the State Pension, and other benefits, but it can be complicated to calculate.

This guide gives you a step-by-step guide to working out how much National Insurance you need to pay if you're self-employed, and other taxes you might need to pay. 

Self-employed National Insurance

If you're self-employed, there are two types of National Insurance contribution you may have to pay. These are based on how much profit you make in a year. 

Class 2 National Insurance contributions

  • If you make profits up to £8,060 in 2016-17, you have to pay Class 2 contributions
  • The amount you have to pay is £2.80 a week in 2016-17 tax year
  • You can claim exemption if your annual profits are below £5,965 in 2016-17.

Class 4 National Insurance contributions

  • If you make profits above £8,060 in 2016-17, you also have to pay Class 4 contributions
  • The amount you have to pay is 9% on profits between £8,060 and £43,000 in the 2016-17 tax year
  • On profits above £43,000, the rate falls to 2%.

Find out more: National insurance explained - read our complete guide to National Insurance

Useful link: HMRC's guide to self employment - a handy tool for when you start a business

Self-employed value added tax (VAT)

If you're self-employed you will have to pay or reclaim VAT quarterly if your turnover is over £79,000 in 2016-17. 

Up to this you can register voluntarily, which may be worthwhile if you can claim a lot of VAT on things bought for your business. 

Not registered for VAT

If you aren't registered for tax you cannot reclaim VAT on things you buy for your business, but you should use prices including VAT when you are recording expenses and allowances so you earn tax relief on the VAT.

Registered for VAT

If you are registered for VAT you must charge it on all goods and services you supply which incur VAT. There are a few exceptions, such as free services and one-off free gifts worth less than £50.

Flat rate VAT scheme

If your turnover is less than £150,000 it could be worth considering the flat-rate scheme. The scheme simplifies your VAT accounting by calculating your VAT payments as a percentage of your VAT-inclusive turnover. It can be good value for small businesses and reduces admin. 

Self-employed capital gains tax (CGT)

If you sell your business, or if you sell your home and part of it has been used exclusively for business, you may have to pay capital gains tax on it. HMRC makes a distinction between using a home 'solely' for business and 'exclusively' for business.

If your home is used 'solely' for business it means that part of your home is used purely for business, but only part of the time. 'Exclusively' means part of your home is set aside for business at all times.  

CGT becomes due when you sell your home only when part has been used 'exclusively' for business, not 'solely'. 

Find out more: Capital gains tax explained - find out more about how CGT works and what you pay

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Last updated:

April 2016

Updated by:

Ian Robinson

 

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