Understanding Tax and National Insurance for Small Self-Employment Earnings

Are you juggling a side hustle alongside your main job? Whether it’s crafting, baking, tutoring, or offering local services like babysitting, it’s essential to grasp the tax and National Insurance implications that come with these small earnings. At Jon Davies Accountants, we’re here to guide you through these intricacies with a friendly, professional approach.

Tax Implications of Your Side Hustle

If your annual profits from all self-employments combined don’t exceed £1,000, you benefit from a trading allowance, making this income tax-free. There’s no need to report it to HMRC under these circumstances. However, this allowance isn’t applied on a per-business basis but across all your self-employment activities.

Should your earnings surpass the £1,000 threshold, you’ll need to register for Self Assessment by 5 October following the end of the tax year you need to report. For instance, for the 2024/25 tax year, your registration and subsequent tax return must be completed online by 31 January 2026. It’s also when your tax and National Insurance dues need settling.

Even with profits over £1,000, the trading allowance can still be advantageous. You can opt to deduct this £1,000 from your earnings rather than itemising your actual expenses, provided these expenses are under £1,000. For those experiencing a loss, filing a tax return could be beneficial, allowing you to carry forward this loss against future profits, potentially reducing future tax liabilities.

Navigating National Insurance

From the 2024/25 tax year, the rules for National Insurance contributions on self-employment have shifted. Only if your profits exceed £12,570 will you need to pay Class 4 contributions. Notably, the obligation for Class 2 contributions has been removed starting this tax year.

For earnings between £6,725 and £12,570, you will automatically receive a National Insurance credit, securing a qualifying year towards your state pension and contributory benefits at no extra cost. If your profits fall below £6,725, you won’t receive this credit, but you can opt to make voluntary Class 2 contributions at just £3.45 per week. This is a cost-effective method to ensure you accumulate the 35 qualifying years required for a full state pension, significantly cheaper than the alternative Class 3 rate of £17.45 per week.

How Can Jon Davies Accountants Help?

Navigating the tax implications of your self-employment can be complex, especially when balancing multiple income streams. At Jon Davies Accountants, we pride ourselves on providing practical, expert advice that demystifies these processes. Whether you’re determining the best approach for using your trading allowance or considering voluntary National Insurance contributions, our team is here to help.

Would you like a clearer understanding of how your small self-employment earnings affect your taxes and National Insurance? Contact Jon or our team today for personalised advice that speaks directly to your unique financial situation.

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Any questions?

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