What tax will I pay when I'm self-employed?

Lisa Vaughan
12 December 2016

Q

I have recently retired and have begun to claim my state pension. I also now receive an NHS pension of around £500 a month.

At the same time, I’ve retrained as a pilates teacher and plan to run several classes a week. The hope is that I will bring in around £1,000 for each eight-week course.

I’d like to know what I need to do with regard to my new self-employed status. What tax will I pay?
 

A

The first thing you need to do is register for income tax and national insurance contributions with HM Revenue & Customs (HMRC). As a self-employed sole trader, you’ll need to complete a self-assessment tax return each year, which must be filed by the 31 January at the latest.

In terms of the tax you pay, you do not normally pay national insurance (NI) once you have reached state pension age, unless you are self-employed and paying Class 4 contributions.  Class 4 contributions would be payable at a rate of 9% if your self-employed profits are between £8,061 and £43,000 a year.

 

You will pay income tax on all of your combined income including your state pension, NHS pension and self-employed earnings if they add up to more than your tax free personal allowance, which is £11,000 for the 2016-17 tax year.  If you earn more than £11,000 in the tax year, the extra will be taxed at the basic rate of 20%. If your total income exceeds £43,000 a year, you will become liable for some tax at the higher rate of 40%.

Some other types of income are tax free too.  You have a personal savings allowance, which allows you to earn up to £1,000 of interest tax free, as a basic-rate taxpayer.  This is reduced to £500 for higher-rate taxpayers.

 

If you own shares in a company or a shares investment, you will not pay tax on the first £5,000 of dividends you receive.  This is your dividend allowance.  Any dividends paid above this allowance would be taxed at 7.5% at the basic-rate tax rate, or 32.5% at the higher rate.