Earning £1,000 or more annually from your sole trader business or side ventures? If so, it’s essential to register for self-assessment. This obligation isn’t limited to business owners alone. Employees with an annual salary of £100,000 or more are also required to register for self-assessment. Complying with this registration can help you avoid potential penalties and pay the right amount of tax.
How to register for self-assessment
Registering for self-assessment is relatively straightforward compared to a limited company registration. For this reason, some sole traders choose to handle the registration themselves. However, there are several important factors to consider when completing the registration process. You have an option to ask professionals like ourselves to register you on behalf of you to ensure.
These are the things you will need on registration: your National Insurance (NI) number, the date you started earning income, and your home address etc.
Taxes for self-assessment
When you become self-employed, there are two different kinds of taxes that you will be affected by: income tax and self-employed National Insurance Contributions (NICs).
Income tax
Income tax is calculated after deducting the Personal Allowance of £12,570 from your total income. This means you don’t pay income tax on the first £12,570 of your earnings. Your tax rate is determined by actual earnings and is divided into three distinct bands:
- Basic Rate (20%): £12,571 – £50,270
- Higher Rate (40%): £50,271 – £125,140
- Additional Rate (45%): Over £125,140
*If your earnings exceed £125,140, you lose the benefit of the Personal Allowance, meaning all your income is taxable with no tax-free allowance.
*If you are employed but also have additional earnings, Personal Allowance is deducted from the total annual income (salary + additional earnings). To ensure you are managing your taxes correctly, it is highly recommended to consult with a professional accountant who can provide guidance tailored to your specific situation.
Self-employed NIC
Self-employed National Insurance Contributions (NICs) play a vital role in the UK’s social insurance system for managing schools, hospitals and many more. Self-employed NICs are categorised into two main classes: Class 2 and Class 4.
Class 2 NIC applies to those with a total annual income of £6,725 or more. If your income is between £6,725 and £12,570, you would be liable to Class 2 NIC. In this case, you’re required to pay £3.45 per week as NIC. However, if you earn less than £6,725, you’re not required to pay NICs. That said, some sole traders planning for retirement choose to voluntarily pay Class 2 to make the year of reporting to count as a qualifying year for their state pension.
If your annual income exceeds £12,570, you are subject to both Class 2 and Class 4 NICs, resulting in a dual contribution. Different rates apply to different earning bands.
- Class 4 NIC rates for 2024-2025 tax year
6% on profits between £12,570 and £50,270
2% on profits over £50,270
Important Note for Employees
Some individuals may prefer to be self-employed due to lower NIC rates. However, keep in mind that being employed provides benefits that you wouldn’t be able to enjoy as a self-employed person. If you’re employed and considering registering for self-employed NICs, you need to consult with a professional accountant first.