Self-employed tax and National Insurance

If you’re self-employed, you are responsible for paying your own tax and National Insurance contributions. You’ll need to keep business records and details of your income and gains so you can fill in an annual Self Assessment tax return. You may also need to register for VAT.

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Register for tax and National Insurance with HMRC

It’s important to let HM Revenue & Customs (HMRC) know that you have started working for yourself as soon as possible – even if you already fill in a Self Assessment tax return each year. If you don’t tell them as soon as you begin self employment you may also incur penalties.

To find out how to register for business taxes, including what information you will need to have to hand follow the link below.

Register your business for HMRC taxes

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Tax and Self Assessment

Once you’re registered with HM Revenue & Customs, you will be asked to complete a Self Assessment tax return each year so that you can provide details of your earnings and any other income and gains you get during the tax year (6 April to 5 April). This information is used to work out how much tax you have to pay.

You can find out more about Income Tax, Capital Gains Tax and tax return deadlines by following the links below.

Read about the basics of Income Tax on the Directgov website- Opens in a new window

Capital Gains Tax on business assets: the basics 

Tax returns if you’re self-employed or in a partnership

For more information about Self Assessment Online and the benefits of filing your tax return online see our section on file your tax return online.

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National Insurance contributions

If you’re self-employed you normally have to pay Class 2 National Insurance contributions. If your annual profits are over a certain amount you also pay Class 4 contributions. In certain circumstances you may be exempt from paying – this is explained below.

To find out more read the pages in this guide on Class 2 National Insurance contributions and Class 4 National Insurance contributions.

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Class 2 National Insurance contributions

You pay Class 2 National Insurance contributions at a flat rate of £2.65 a week. However, if your earnings are below £5,595 per year (2012-13) you might not need to pay – this is explained below.

Class 2 contributions count towards certain benefits, like the basic State Pension, Maternity Allowance and Bereavement Benefit. But any claims for benefits may be affected if payments are late. Class 2 contributions do not count towards the additional State Pension, Statutory Sick Pay or Jobseeker’s Allowance, so you might want to think about making other arrangements like a personal pension and income protection insurance. (The only exception is if you’re a share fisherman paying Class 2 contributions at the share fishermen rate. In this case your contributions do count towards Jobseeker’s Allowance.The share fisherman rate of Class 2 contributions is £3.30 a week (2012-13).

You can register for Class 2 National Insurance contributions when you register for business taxes with HM Revenue & Customs (HMRC).

Register your business for HMRC taxes on the HMRC website- Opens in a new window

If you’re already self-employed

If you are already self-employed and need to pay Class 2 National Insurance contributions, call the HMRC Newly Self-employed Helpline.

Find contact details for the HMRC Self-employed Helpline on the HMRC website- Opens in a new window

Paying Class 2 National Insurance contributions

Once registered, you can choose to make your payments either monthly or 6 monthly by Direct Debit. From April 2011 your Class 2 National Insurance contributions payments will become due on the 31 January and 31 July, the same dates as Self Assessment tax bill. Follow the link below to find out more about payment dates.

During periods when you are unable to work and where you have registered your work status with the Department for Work and Pensions, HMRC will be notified. They’ll adjust the amount of Class 2 contributions due for those periods.

Find out about National Insurance and state benefits on the Directgov website- Opens in a new window

Exceptions to paying Class 2 National Insurance contributions

You do not have to pay Class 2 National Insurance contributions if any of the following apply:

• you are under 16
• you have reached State Pension age
• you’re a married woman or widow who is entitled to pay reduced contributions
• your earnings are below a certain level – explained below
• for complete weeks when you could not work if certain conditions are met – explained below

Find out more about stopping paying National Insurance contributions at State Pension age on the Directgov website- Opens in a new window

Read about married women, widows and reduced National Insurance on the Directgov website- Opens in a new window

If you have low earnings

If you earn less than £5,595 per year you can apply for a Certificate of Small Earnings Exception and not pay Class 2 National Insurance contributions. However, you might decide to carry on paying them voluntarily to keep your entitlement to the State Pension and other benefits.

Go to form CF10 Self-employed people with small earnings and help notes on the HMRC website- Opens in a new window

Read about voluntary National Insurance contributions on the Directgov website- Opens in a new window

If you paid Class 2 National Insurance contributions and your earnings were below the exception limit, you can apply for a refund. But there are time limits for applying.

Find out about claiming back overpaid National Insurance contributions, including time limits, on the Directgov website- Opens in a new window

Class 2 National Insurance credits if you could not work

You don’t have to pay Class 2 National Insurance contributions for any complete week when you cannot work due to illness or you’re caring for someone and are receiving certain benefits but you may be able to get National Insurance credits instead. Credits can help maintain your National Insurance record and so protect your entitlement to the basic State Pension and certain other state benefits.

Find out about National Insurance credits on the Directgov website- Opens in a new window

Also see the page in this guide on Class 4 National Insurance contributions.

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Class 4 National Insurance contributions

The amount of Class 4 National Insurance contributions you have to pay for any tax year is based on your profits for that year. You pay 9 per cent on annual profits between £7,605 and £42,475 (2012-13) and 2 per cent on any profit over that amount.

You work out your Class 4 National Insurance contributions on your tax return and pay them alongside your Income Tax. Class 4 National Insurance contributions don’t count towards benefit entitlements.

If you have more than one business, special rules apply for calculating adjustments to profits on which you pay Class 4 National Insurance contributions.

If you send your return online, your Class 4 National Insurance contributions will be worked out for you automatically. If you send in a paper tax return by 31 October following the end of the tax year and leave the space blank, HM Revenue & Customs (HMRC) will work out your contributions. You can work out your Class 4 contributions yourself by using the Class 4 calculator in the notes that come with your tax return supplement.

Download a helpsheet on working out your Class 4 contributions [opens in a new window]

Exceptions to paying Class 4 National Insurance contributions

You don’t have to pay Class 4 National Insurance contributions if any of the following apply:

• you are under 16
• you are still working in the tax year after you reached State Pension age – find out more in the section ‘Class 4 National Insurance contributions after State Pension age’ below
• you are not resident in the UK for tax purposes

If you are under 16 you’ll have to apply for an exemption by filling in form CA2835U. You can get the form by writing to:

HM Revenue & Customs
Deferment Services
National Insurance Contributions Office
Benton Park View
Newcastle upon Tyne
NE98 1ZZ

Go to HMRC6 ‘Residence, domicile and the remittance basis’ on the HMRC webite- Opens in a new window

Class 4 National Insurance contributions after State Pension age

You don’t have to pay Class 4 National Insurance contributions if you are still working and over State Pension age at the start of the tax year to which your Self Assessment tax return relates. If your birthday falls on 6 April itself you are still exempt from paying. For example, if you are completing a tax return for the tax year 6 April 2012 to 5 April 2013, you will not have to pay Class 4 National Insurance contributions for any of that year if you reach State Pension age on 6 April 2012 or any date before then.

If you reach State Pension age during the tax year, you will have to pay Class 4 National Insurance contributions for the whole of the year.

Find out about stopping paying National Insurance contributions at State Pension age on the Directgov website- Opens in a new window

For information on rules affecting your tax liability in the UK as a resident or non resident see the guide below.

How to pay Self Assessment

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Value Added Tax (VAT)

If your business turnover is more than the VAT threshold (currently £77,000) you’ll normally have to register for VAT. Even if your turnover’s below the threshold it might benefit your business to register voluntarily.

If you have an accountant they will be able to advise you, or you can ring the HM Revenue & Customs (HMRC) VAT Helpline.

Find contact details for the HMRC VAT Helpline on the HMRC website- Opens in a new window

When to register for VAT

For more detailed guidance see our section on VAT.

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Self-employed record keeping

Legally you have to keep records for your business and for any other income you get. This is so you can fill in your tax return and show that the figures are right. You’ll need to keep at least:

• invoices for sales and purchases
• receipts for business expenses
• bank records

Good records will also save you time and help you run your business more efficiently. You can find out more in our guide below on record keeping.

Set up a basic record-keeping system

Find out what records you should be keeping

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