3 – Tax and National Insurance

Last Updated on 10 June 2020

Do you live in Scotland? There’s a different help sheet for you!
See Scottish Tax and National Insurance help sheet >

National Insurance for employees/PAYE

Employees and company directors pay their NI via the company PAYE system. This is Class 1 National Insurance and is a percentage of the salary, normally 12% (2020-21 rate).

National Insurance for Sole Traders (self-employed):

Sole traders pay two types of National Insurance:

  • Class 2 – £3.05 per week in 2020-21, regardless of income or profit.
  • Class 4 – 9% of profits (from the self-employed business) in 2020-21 between £9,500-£50,000 (2% on taxable profits above £50,000)

Class 2 and Class 4 NICs are now both taken through the tax return system at the end of the tax year.

If you’re fully paid up, Class 2 NI contributions entitle you to:

  • Employment & Support Allowance (if sick or self-isolating)
  • Maternity allowance
  • Bereavements benefits (if you lose your spouse/civil partner)
  • State pension

Sole traders must make Class 2 contributions if under state retirement age. You will not need to pay if your earnings are less than the Small Profits Threshold of £6,475 per year (2020-21) – though it may still be worth paying to ensure your National Insurance record is complete if you are not making other NI contributions.

The proposed abolition of Class 2 was abandoned in September 2018.

[Class 3 are voluntary contributions. The rate is £15.30 per week (2020-21)]

Note: You are allowed to be both self-employed and employed at the same time, but be careful that you are not overpaying National Insurance contributions, as your employer pays your Class 1 NICs through the PAYE system.

Tax

Sole traders will pay income tax on the business’s profits, after you’ve taken into account allowable business expenses, pension contributions, capital & personal allowances.

Some key dates for sole traders (and other income tax payers)

  • The income tax year runs 6th April to 5th April
  • 31 January – deadline for getting information to HMRC about the previous tax year’s income and expenditure.
    Also the deadline for paying tax owing from the previous year(s) AND half the forecast amount owing for the current tax year.
  • 31 July – deadline for any outstanding income tax not paid by the previous January.

It can take a couple of weeks to get your Government Gateway log in. So don’t leave it to January!

NB: Thanks to the coronavirus, you can defer paying the July 2020 tax until Jan 2021.
NB: Tax reporting is going digital soon. See help sheet 4.

Limited Companies

Must register with HMRC for Corporation Tax and PAYE. Must use PAYE for directors and other employees. (Partnerships and sole traders must also operate PAYE system if they are directly employing anyone else.)

Corporation Tax is 19% for all limited companies (2020-21).

Find out more:
National Insurance Helpline – 0300 200 3500 (Weekdays only, 8am-5pm) www.gov.uk/personal-tax/national-insurance
www.gov.uk/browse/tax
www.hmrc.gov.uk/rates – pretty straightforward list of tax rates and thresholds
www.taxationweb.co.uk/ | www.freelanceuk.com/ – support for creative freelancers
www.litrg.org.uk – Low Incomes Tax Reform Group – charity with very good site
Unions will normally give advice to their members about tax status.

Useful HMRC (tax office) numbers for production freelancers:
– Freelance status,‘Lorimer Letters’/LP10 – 0300 123 2326 (option 1)
– IR35 enquiries – 0300 123 2326 (option 2)

Income tax bathtub graphic
The Income Tax (& NI) Bathtub 2020-21 | Not Scotland

Note: Income tax rates and thresholds for Scottish residents are different. (See separate help sheet.)

Posted on 29 January 2020