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Self Employed Taxes

Tax is usually due to be paid and cleared by 31st January each year, and sometimes also by 31st July each year. When you have two tax payments to make within one year, this is known as an "Half Estimate on Account".


Half estimates on account is the process in which HMRC will assess your tax due based on your profits, and ask you to pay tax again in advance towards the following year. Once the following years tax is calculated, the half estimates on account you have paid previously, will offset the tax due, and will reduce any balancing charge left to pay the following January.


It is possible, that sometimes, the half estimates on account you have already paid, covers any tax due in the following year, in these situations, all you will be required to pay, is the half estimates on account based on that years tax position.


If you have overpaid tax in the previous year due to your profits being lower than before, you can either receive a refund of the difference, have it allocated towards future tax payments by having it held on account, or use it to reduce any further half estimates on account that become payable.


Half estimates on account, are only added and calculated if a businesses tax due, is above £1000.


Here are two examples in which half estimates on account, do and do not become due.

We will refer to the taxable income as "Assessable" since there are many factors in which you may reduce the tax due, and won't always be purely based on your businesses "Net Profit Before Tax". Examples given are based on current taxable thresholds and may change in future years after this article was written. We also assume this is the first year of trade, and there is no other income.


When half estimates do become due:

Assessable £25000 

Class 2 National Insurance £159.00

Class 4 National Insurance £1395.00

Tax @ 20% £2500

Total Tax and Ni Due £4054.


Payable as follows,

January 31st

Balance £4054 plus one half estimate on account £1947.50 = £6001.50

July 31st £1947.50 second half estimate on account.


From the above example, you can see that the actual tax due, and 1 half of it, are added together and become payable in January, and the second half becomes due in July. You may also notice, that i have not included the Class 2 National Insurance when calculating the half estimates on account. This is because they are not included in the calculations.


When half estimates do not become due:

Assessable £12500

Class 2 National Insurance £159.00

Class 4 National Insurance £270.00

Tax @ 20% £0.00

Total Tax and Ni Due £429.00

Payable as follows,

January 31st £429.00 July 31st £0.00.


Because the total tax due was below £1000, we do not include any half estimates on account, and the total tax due becomes payable in January of each year this remains the same.


Class 2 National Insurance

Class 2 Ni, is the National Insurance contribution you pay towards your state pension. Providing your net profit is above the threshold for when Class 2 becomes due, you will make a payment towards your state pension. If your profits do not exceed this threshold, you can opt to voluntarily pay Class 2 instead. If you failed to register for Class 2 when you became Self Employed, then Class 2 will be removed from calculating your tax and you will not pay anything towards your state pension.


Class 4 National Insurance

Class 4 NI is  the National Insurance contribution you will pay towards things such as the National Health Service, like Class 2, your net profit must exceed the lower rate threshold for Class 4 to become due, there is also an upper rate threshold whereby if your profits exceed this, you will pay an additional rate of Class 4.


Tax @ 20%,40%, and 45%

Tax due is based on a number of lower and upper thresholds depending on your net profit, and after any unused Personal Allowance. Personal Allowance is the amount of profit you can earn before you pay any tax.

Once the personal allowance and the threshold for tax at 20% has been met, any additional profit will be taxed at the next tax rate. Again, once that additional tax rate threshold is met, all further profit will be taxed at the highest rate.


Personal Allowances

Your personal allowance is the amount of profit you can receive before you pay any tax, the amount of personal allowance can vary depending on a number of factors, but for the average person, this is usually set at an amount decided by the Chancellor.

Sometimes, there can be a situation where you are not entitled to a personal allowance, this means that all profits will be taxable.


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