What Happens If I Dont Declare Self-Employment
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This article looks at what happens if you don't declare self-employment. We look at how to report self-employed income and how HMRC knows about undeclared income.
Income tax when self-employed
2020-21 tax year:
You won't pay any income tax if you earn trading profits of £0 - £12,500.
2021-21 tax year:
This threshold increases from £0 - £12,500 to £0 - £12,570.
2020-21 tax year:
You will have to pay 20% of any earnings into your income tax if you earn between £12,501 - £50,000.
2021-22 tax year:
This threshold increases to £12,571 - £50,270.
2020-21 tax year:
The income tax rate on your trading profits will be 40% for those earning between £50,001 - £150,000.
2021-22 tax year:
This threshold increases to £50,271 - £150,000.
2020-21 tax year:
If you earn trading profits over £150,000 per year, your income tax rate will be 45%.
2021-22 tax year:
The same rate as the 2020-21 tax year applies.
When you are self-employed, the income tax you pay is not like everyone else's in traditional employment. Rather than paying tax on the entirety of your total income, you instead pay income tax on your trading profits.
To work these out when filing your self-assessment, simply deduct your business expenses from the total income you received for your work. This is the final amount you will pay your self-employed income tax on.
The rate of income tax you need to pay on your self-employed profits will vary depending on how much you earn. Still, it will essentially be the same rate as those in traditional employment, like your National Insurance Contributions.
Here is a summary of the different rates of income tax you will pay, depending on how much money you earn:
It is also important to remember that you won't pay the same income tax rate on all your trading profits. You will only need to pay the income tax rate for your trading profits within applicable brackets.
For example, we'll take a look at someone who earns £52,000 per year to see how much income tax they'll have to pay:
Trading profits: £52,000
They pay no income tax on the initial £12,500.
The basic income tax rate of 20% applies for the next £37,500 (£50,000 - £12,500 = £37,500).
The higher income tax rate of 40% applies to the remaining £2000 (£52,000 - £50,000 = £2,000).
There is no additional income tax rate of 45% to pay.
While this example is appropriate for England, income tax rates will differ in different parts of the union.
The Welsh Government sets the income tax rate in Wales, which was the same as in England and Northern Ireland for the 2020-21 tax year. The Scottish Government sets the income tax rate for Scotland, which is different from those in England, Wales and Northern Ireland.
How much can you earn tax-free if you're self-employed?
Those who are self-employed are entitled to the same Personal Allowance as those who are employed. This is a determined portion of your income that you do not have to pay income tax on.
In the 2020-21 tax year, this Personal Allowance claim was set at £12,500, meaning you could earn this much before your income was placed into an income tax bracket.
If your income amounts to more than £100,000 per year, the £12,500 Personal Allowance is reduced.
The rate at which the allowance is reduced works out at £1 for every £2 of income you earn above the £100,000 threshold, as per the 2020-21 tax year regulations. But things are not so straightforward if you have multiple jobs, with only one being self-employed.
HMRC only allots you one Personal Allowance. Therefore, if you have multiple jobs with multiple incomes, HMRC will most likely allot your Personal Allowance to the one they view as your main employment.
Usually, this means the largest of your incomes is chosen as your main one, to which the Personal Allowance will apply to.
The easiest way to determine which of your incomes HMRC has classed as your main one is to look at your tax code.
The corresponding tax code for the 2020-21 tax year is 1250L, denoting it as your main income and eligible for the Personal Allowance. Alternatively, your secondary job or jobs will have tax codes of BR, D0 or D1.
How do I report my self-employed income?
Unless you are entitled to tax relief in the form of a trading allowance, you will need to report your income to HM Revenue and Customs (HMRC).
To be placed into the right tax bracket and pay how much tax you owe, you will need to calculate your taxable income from your self-employment.
Once registered as self-employed with HMRC, they will notify you soon after the tax year is ended so you can complete an online tax return for that previous tax year.
The UK Government abolished the Self-Assessment tax return back in 2015, replacing it instead with the "Making Tax Digital" campaign.
While still in the early stages of development, this new system will help self-employed taxpayers to arrange their tax payments better.
This new method of declaring your self-employment income to HMRC is set to come into common use in April 2023.
How Does HMRC Know About Undeclared Income?
HMRC unveiled a new form of software nicknamed the "Snooper Computer" in 2010. Its real name is "Connect", and it is a very sophisticated system through which HMRC can analyse vast amounts of financial information very quickly.
The main aim of implementing this software is to root out any undeclared income from taxpayers.
There is no way to cheat or confuse this system. The Connect software analyses countless pieces of entirely unrelated data searching for patterns, associations and fluctuations in business records.
In this way, the UK Government can see when a person's lifestyle and declared income do not match up. When this occurs, they can be fairly certain that such people are evading their tax obligations.
Can HMRC Trace Bank Accounts?
HM Revenue and Customs have sweeping powers when it comes to finding those who undertake deliberate tax evasion.
In order to ensure everyone pays the right amount of income tax, they can submit information from numerous sources, including your bank accounts. While HMRC doesn't disclose which sources they go to for their Connect details, here are a few obvious ones they look into:
Other government departments or agencies, such as DVLA, Land and Registry, Border Agency, DWP, Companies House, The Electoral Roll, Council Tax Records.
Any Tax Returns you have already filed, including Value Added Tax (VAT), Corporation Tax, Capital Gains Tax, the Paye system and Income Tax.
Your financial records with any banks, building societies, online payment providers, credit reference agencies, debit and credit card accounts, crypto-currency asset platforms and insurance providers.
The Common Reporting Standard, which is an international strategy aimed at tackling tax havens, where they can find your financial information that exists in other countries.
Any online retail operators, such as Amazon, Airbnb, eBay, Rightmove and Zoopla.
Public information on social media, including your Facebook, Twitter, LinkedIn and Instagram profiles.
There are numerous other sources of information that HMRC can use when finding undeclared income. Flight manifests, The Charities Commission and even Google Earth can reveal crucial information when looking for those who aren't paying the right income tax.
How Can I Tell If HMRC Is Investigating Me?
There are various ways that HMRC may launch an investigation into your financial circumstances.
These include things such as information highlighted by the Connect system, anonymous tip-offs, inconsistencies or errors in your tax returns or HMRC simply taking a closer look at the industry you work in.
When you are under investigation for tax fraud, HMRC will send you a letter informing you of the fact.
Seeking professional assistance as soon as possible when you are aware you are under investigation for a compliance check is the best course of action.
In some instances, it will simply be a mistake or a mix up in the system. But whatever the reason for your investigation, it is unwise to attempt to contact HMRC about your investigation on your own.
Even if all of your tax records and paperwork are in order and you pay taxes in full and on time, having a professional accountant oversee your taxes is the best way to avoid any penalties.
There are various penalties you will have to pay for any late filing of your tax returns, depending on the severity of your mistake. All tax owed should be paid by 31 January at the end of each tax year. Here is a brief rundown of these late payment fines:
0 - 3 months late: automatic £100 penalty
3 - 6 months late: charged interest of £10 per day, up to 90 days (£900 total)
6 - 12 months late: whichever is highest out of £300 or 5% of the overdue tax bill (on top of the previous penalties)
12 + months: another £300 or 5% of the overdue tax and a fine of 100% of the unpaid tax.