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Income tax for the self-employed

Self-employed National Insurance

By Ian Robinson

Article 6 of 6

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Self-employed National Insurance

Discover what National Insurance contributions you have to make if you're self-employed, as well as other taxes you may need to pay.  

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 contributions 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. 

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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 of up to £8,164 in 2017-18, you have to pay Class 2 contributions
  • The amount you have to pay is £2.85 a week in the 2017-18 tax year
  • You can claim exemption if your annual profits are below £6,025 in 2017-18.

Class 4 National Insurance contributions

  • If you make profits above £8,164 in 2017-18, you also have to pay Class 4 contributions
  • The amount you have to pay is 9% on profits between £8,164 and £45,000 in the 2017-18 tax year
  • On profits above £45,000, 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 more than £85,000 in 2017-18. 

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

Not registered for VAT

If you aren't registered for tax, you can't 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 that 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 reduces adminand  can be good value for small businesses. 

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

  • Last updated: April 2017
  • Updated by: Gareth Shaw

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