If you are self-employed you will be responsible for paying your own income tax and National Insurance Contributions. Once you have registered as self-employed with HM Revenue & Customs you will be sent a Unique Taxpayer Reference number which should be used in all future correspondence with HMRC. You will pay income tax on any profit from your business. This is calculated by deducting any allowances, tax reliefs and allowable expenses incurred during the running of your business from your total income. The amount left is your total profit which will be liable for income tax.
If you are a partner in a partnership, you will be liable to pay your own income tax and National Insurance contributions. To avoid unexpected penalties, it is important to keep timely and accurate records for HMRC. This will also help you to keep track of your business finances and plan accordingly. If you are self-employed you will usually have to pay Class 2 National Insurance contributions. The amounts you pay vary each year, but for 2012-13 the amount is £2.65 each week. If you earn less than £5,595 a year you may be classed as exempt from payments. Class 2 National Insurance Contributions will contribute towards specified state benefits like the basic state pension or bereavement benefit. If you make payments late or miss payments your entitlement to state benefits could be affected.
You can register to pay Class 2 National Insurance contributions when you inform HMRC of your self-employment or, if you are already self-employed, call HMRC’s helpline. You can choose to pay your Class 2 National Insurance contributions either on a monthly basis or every six months using direct debit. For six monthly payments, you will be due to pay your Class 2 National Insurance contributions on the 31st of January and 31st July, which corresponds with your payment dates for self-assessment income tax. It is recommended by HMRC that you pay your National Insurance Contributions by direct debit as it is faster and easier. A direct debit instruction must be completed in order to set up payments for your Class 2 National Insurance contributions. This is a form CA5601 which is completed, signed and dated by an individual who is newly self-employed. If you are already registered as self-employed you will complete a form CA5611. This form should be completed if you want to tell HMRC that you have changed your bank account, would like to pay every six months rather than monthly or would like to start paying by direct debit.
If you are self-employed and have profits above a certain level which varies each year, you will be required to pay Class 4 National Insurance contributions. For 2012-13 the level is set for any profit from £7,605 to £42,475 and you will pay nine per cent on this amount. If you have profits above this level they will be charged at two per cent. The amount of Class 4 National Insurance Contributions to be paid will be calculated by HMRC if you complete and submit your self-assessment tax return online. If you complete a paper self-assessment tax return, you can either calculate the amount payable yourself using the calculator provided with the notes or, if you leave the box blank, HMRC will calculate the amount for you.
If you are 16 years old or younger or you are above the state retirement age and still working, you don’t have to pay Class 4 National Insurance contributions. If you think you may have paid too many contributions, you may claim them back from HMRC.
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