Decoding the Self-Employed Tax Code: A Comprehensive Guide

In today’s ever-evolving economy, more individuals are opting for self-employment as a means of pursuing their passions, gaining flexibility, or simply as a necessity. However, navigating the complex world of taxes can be daunting for the self-employed.

Understanding the nuances of self-employed taxes is essential for ensuring compliance and optimising financial outcomes.

In this article, we will explain what a tax code is and the significance of a Unique Taxpayer Reference (UTR) for self-employed people.

What is a Tax Code?

If you’re employed and receive a salary through the PAYE system (Pay As You Earn), your tax code is crucial for ensuring the right amount of income tax is deducted from your salary.

Here’s a breakdown of what a tax code does:

• Calculates Tax-Free Allowance: The numbers in your code represent the amount you can earn in a tax year without paying income tax.
• Considers Other Income: The code also factors in other income you might have that isn’t taxed at source, like untaxed interest or income from a side hustle.
• Accounts for Benefits: The value of certain benefits you receive from your employer, such as a company car or private health insurance, can also be included in your tax code.

Understanding the Letters in Your Tax Code

• L: This is the most common letter in tax codes. It signifies you’re entitled to the standard tax-free personal allowance (£12,570).
• BR: This stands for basic rate. It means all your income is taxed at the basic rate. This can happen if you have multiple jobs.
• M and N: M indicates you’ve received a transfer of 10% of your partner’s Personal Allowance. N means you’ve transferred 10% of your Personal Allowance to your partner.
• T: HMRC needs further information before being able to determine your tax code, often used when there are complex tax affairs.
• 0T: These digits are used when all your income is taxed and there’s no personal allowance left.
• K: This letter indicates that your total allowances are less than your total taxable income. It could mean you have untaxed income, such as benefits or a company car.
• P: It means you are aged 65 to 74 and eligible for the full personal allowance.
• Y: You are aged 75 or over and eligible for the full personal allowance.

How to Find Your Tax Code

It’s important to check your payslip to make sure the code being used is correct. An incorrect code could result in you overpaying or underpaying tax. Here’s how to find your tax code:

• Payslip: Your tax code is typically listed on your payslip, usually near your gross pay and net pay.
• P45: If you recently started a new job, you might have received a P45 form from your previous employer. This form contains your tax code for the current tax year.
• HMRC Online Services: You can access your tax code online through HMRC’s online services platform. You’ll need to register for a Government Gateway account if you haven’t already.
• Contact HMRC: If you can’t find your tax code through the methods above, you can contact HMRC directly by phone or online message.

Checking Your Tax Code Online

Here’s a simple guide to finding your tax code online:

Your tax code can change. So, it’s a good idea to check it regularly. This ensures you’re paying the correct amount of tax.

What is a Self-Employed Tax Code?

As a self-employed person, you won’t receive a tax code. Instead, HM Revenue & Customs (HMRC) assigns you a Unique Taxpayer Reference (UTR) when you register as self-employed. You’ll use this 10-digit code when filing your self-assessment tax return.

What is a Self-Assessment Tax Return?

A self-assessment tax return is a system used by HMRC to collect income tax. People and businesses with other income must report it on a self-assessment tax return if it is not already deducted at source through the PAYE (Pay As You Earn) system. This includes the self-employed, partners in a partnership, individuals with income from savings, investments, and property, or those with complex tax affairs.

Taxpayers are responsible for completing their self-assessment tax returns accurately and submitting them to HMRC by the deadline, which is usually January 31st following the end of the tax year (which runs from April 6th to April 5th). Penalties apply for late submissions or inaccurate information.

Key Self-Assessment Deadlines

Understanding the deadlines associated with self-assessment is crucial to avoid penalties. The key dates for the self-assessment tax year are as follows:

• 5th April: End of the tax year.
• 31st October: Your paper tax return must be filed.
• 31st January: Your online tax return must be filed, and any tax owed must be paid.

How to Submit a Self-Assessment Tax Return

Here’s a step-by-step guide to help you submit your self-assessment tax return:

1. Collect all the relevant documents and information you’ll need to complete your tax return.
2. Log in to your government gateway account and select the option to start a new tax return.
3. Enter your personal information such as your name, address, National Insurance number, and Unique Taxpayer Reference (UTR).
4. Enter details of all your income for the tax year, including employment income, self-employment income, rental income, interest, dividends, and any other sources of income.
5. Deduct any allowable expenses from your income to reduce your tax bill.
6. Once you’ve entered all your income and deducted allowable expenses, the system will calculate your tax liability for the year, as well as your national insurance contributions, and student loan repayments (if applicable).
7. Review and submit your tax return.

How to Pay Your Self-Assessment Tax Bill

HMRC provides various payment options to make it convenient for taxpayers to settle their tax liabilities. Here’s how you can pay your tax bill:

• Direct debit
• Debit or credit card
• Bank transfer
• Telephone banking
• Cheque through the post
• At your bank or building society

Alternatively, if you’re both employed and self-employed, and your self-employed income is quite small, and you don’t have other complicating factors in your tax situation, you might be able to pay your self-employment tax through your tax code as well.

This option is available if your self-employment income is less than £3,000 per year. You can request this by contacting HMRC, who will then adjust your tax code to collect the additional tax through your PAYE system over the year. This can help in spreading out your tax payments and simplifying your financial management.

Income Tax Rates

Your income tax rates and thresholds are determined by the amount of profit you make in a tax year.

Here are the income tax rates and thresholds for the tax year 2024/2025:

• Tax-Free Personal Allowance: The Personal Allowance is the amount you can earn before you start paying income tax. For the tax year 2024/2025, the standard Personal Allowance is £12,570.
• Basic Rate: The Basic Rate (20%) applies to income above the Personal Allowance and up to £37,700.
• Higher Rate: The Higher Rate (40%) applies to income above the Basic Rate threshold (£37,700) and up to £125,140.
• Additional Rate: The Additional Rate (45%) applies to income above £125,140.

It’s important to note that these rates apply to your taxable profits, which are your total income minus allowable business expenses and any applicable deductions and reliefs.

Additionally, if you’re self-employed, you’re also required to pay Class 4 National Insurance contributions on your profits.

Navigating Self-Employed Tax Responsibilities and FAQs:

While you won’t have a traditional tax code as a self-employed individual, understanding the importance of your UTR and the self-assessment system is essential. By familiarising yourself with income tax rates, allowable expenses, and payment options, you can ensure you meet your tax obligations and optimise your financial situation.

Mazuma’s accounting services can provide valuable support in managing your self-employed finances effectively, allowing you to focus more on your entrepreneurial pursuits with confidence.

1. How do I register for Self Assessment?

If you’re self-employed or have other untaxed income, such as rental income or dividends, you’ll need to register for Self-Assessment. You can usually do this online through the HMRC website. You’ll need to provide information about your income and expenses, so it’s a good idea to keep accurate records.

2. What is a Self Assessment Tax Return?

A Self-Assessment Tax Return is a form you fill in each year to declare your income and expenses. This helps HMRC calculate the right amount of tax you owe. You’ll need to report all your income, including any income from self-employment, rental property, or investments. You can also claim deductions for business expenses, such as rent, utilities, and professional fees.

3. How do I work out how much tax I owe?

You can use HMRC’s online tax calculator to get an estimate of how much tax you’ll need to pay. However, it’s important to keep accurate records of your income and expenses to ensure you’re paying the right amount of tax. You can also consult with a tax advisor for more personalized advice.

4. How do I pay my Self Assessment tax bill?

You’ll usually receive a Self Assessment tax bill from HMRC. You can pay this bill online, by phone, or by post. It’s important to pay your tax bill on time to avoid penalties and interest charges.

5. How do I update my tax code?

Your tax code determines how much Income Tax is deducted from your earnings. If your circumstances change, such as starting a new job or becoming self-employed, you may need to update your tax code. You can usually do this online through the HMRC website or by contacting HMRC directly. It’s important to update your tax code to ensure you’re paying the right amount of tax.