Self Employment and the Income Tax Easily Explained

There are many people who are trying to do something for a living apart from the regular 9 to 5 job that they have. As pension-transfer-tax-1-e1458722064238you certainly know, everyone has to pay taxes for the money that they are earning and each country has its own institution that takes care of this.

If you’re already employed and you get a pay cheque from the company you are working for, they are taking care of paying the taxes for you. The accountants will calculate everything and the money will go from the company to the state in a special account designed for collecting the taxes.

However, things change if you have your own business, and here are more possibilities. You can be the sole owner of the said business and be self-employed, or you could be the manager and have more people in your subordination. The thing is that you will have to pay now the taxes and everything else that comes from this, no matter if you’re self-employed or if you have several people working for you.


The HMRC is the best place where you could get additional information on this, so use the HMRC contact information for getting the right tips about this. Until then, let’s see something that could interest you about this.

Self Employment

Being self employed means that you have a business and you are the only one working there. It’s the case of those small businesses that activate in different areas like providing online services, a small flower shop, a nail designer and so on. Usually, it’s about those businesses that can be run by a single person and who don’t have more employees.

So, if you are self employed, you will have to pay the income tax and also declare the profits from your business. It doesn’t matter how much money you make on month, because you will still have to pay the taxes even if the sum is $100.

The Income Tax

Keep in mind that if you’re self employed, you will have to pay the income tax based on your profit, and not on the gross income. The profit is calculated as the difference of money that results after all the investments were calculated. For example, let’s say you have a flower shop. To calculate the profit you will have to know the business expense and deduct it from the business income.

Tax-BurdenIf you have been in the business for a longer period of time – several years, you can also claim capital allowances, and you can also deduct the losses – if there were any – from previous years. What results is the amount that you will use for calculating the income tax.

How to Do It

Usually, you can use the HMRC information and use the online forms that they give you, but if you’re not sure about something, it’s better to ask an accountant to help you out. If you plan to expand the business in the future, it’s better to have someone specialized to keep track of the income taxes that you’ve paid along the years and also help you with the accountability books that are so necessary in a business.

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What You Need To Know About UK’s Tax System

If you are a businessman looking to open a business in the UK or if you are planning to migrate, it is important to familiarize yourself to UK’s tax system.

UK has the longest tax code in the world. It is revealed that it has doubled in size since 1997 due to the annual changes to tax and duty through a law called the Finance Act, which may change the principles, set out in the main tax acts thus changing the tax rates as Generic-hands-with-moneywell.

As in other countries, personal income tax is the largest source of income in the UK. It’s second largest source are from national insurance contributions, value added tax (VAT) is the third and corporation tax as the fourth largest source of UK’s overall income.

In the UK, taxation are paid to the local councils and to the central government agency called Her Majesty’s Revenue and Customs (HMRC or HM Revenue & Customs). The local councils collect taxes called business rates and council tax from households.


Brief History

Before corporation tax was introduced in 1965, companies were part of the income tax system which was first introduced during the Napoleonic war and was later on re-introduced in 1842. Margaret Thatcher who is known to favour indirect taxation and reduce government spending reduced personal income tax’s basic rate from 33% to 20% during the 1979 to 2007 governments.

From 1940 to 1973 there was a so called purchase tax with a rate of 25%, on 1973 value added tax (VAT) replaced purchase tax increasing the standard rate by 10% at the start of 1973, then effective on January 2011, it was increased to 20% when the UK joined the European Economic Community.

In 2010 the office of Her Majesty’s Treasury formed the ‘Office of the Tax Simplification’ (OST) to function as advisor to the government in matters regarding to the simplification of the tax code.


Principles of Value Added Tax

In the UK, VAT is regulated by the Value Added Tax Act 1994 and the Finance Act among others, which sets the annual VAT rates. The three different VAT rates are: standard rate (20%), reduced rate (5%) and zero rate (0%). There are also some goods and services which are outside the VAT system, thus are exempted from VAT.

Every three months, VAT returns should be submitted online. Businesses however has the option of choosing their “VAT accounting periods” when registering for VAT with HMRC.

For quarterly returns, the filing and payment is at 1 calendar month and 7 days after the Vat accounting period has ended.


Principles of Corporation Tax

HMRCLimited companies and foreign companies having a UK branch are required to pay corporation tax on taxable profits, which includes investments, trading profits and chargeable gains from selling assets. A UK limited company is required to pay corporation tax on all profits coming from the UK and abroad. A foreign company with an office or branch in the UK on the other hand, is required to pay tax on profits from its UK activities only.

At the least, a limited company is required to file its annual accounts nine months after its financial year-ends. If the profit of a limited company amounts to 1.5 million then the company is required to pay corporation tax 9 months and 1 day after the company’s accounting period ends and file a company tax return 12 months after the company’s financial year ends. If a limited company’s profits amounts to over 1.5 Million then, four equal instalments are normally required.

There are a few more principles and other information that will be helpful and which will be better explained by HMRC FAQs. To know more, contact HMRC right away.

Continue reading..What You Need To Know About UK’s Tax System