Being self-employed or working as an employee is a big decision. Not only does it affect your career, but it also affects how you are taxed. It’s important to understand the difference between PAYE (Pay As You Earn) and self-employment when making this decision.
PAYE is the system used by employers to collect income tax and national insurance contributions from their employees’ pay. This means that HM Revenue & Customs (HMRC) will deduct money directly from their wages each month, which is then paid into their bank account with the deductions already taken out. Employees who work under PAYE also receive an annual P60, which shows them how much they have earned over the course of that year and how much they have paid in taxes.
Self-employment is slightly different from working under PAYE because those who are self-employed are responsible for calculating, filing, and paying their own taxes – there is no middleman involved in this process like there would be for PAYE employees. Self-employed individuals must register with HMRC within three months of starting work in order to meet their obligations as self-employed workers; failure to do so can result in penalties being applied.
Once registered, they will be sent a Unique Taxpayer Reference (UTR) number which they must use whenever they communicate with HMRC about taxes due on their earnings. Self-employment also requires individuals to complete a Self Assessment tax return each year, detailing all income earned throughout that period as well as any expenses incurred while running their business – this includes such things as equipment purchased for work purposes or travel costs related to work activities.
When deciding whether to work under PAYE or become self-employed, it’s important to think about the responsibilities associated with each option before making your decision. Working under PAYE means that someone else takes care of tax payments on your behalf; however, if you choose self-employment then you will be responsible for ensuring that your payments are up-to-date and accurate at all times. Both options have advantages and disadvantages depending on your individual circumstances; understanding these pros and cons can help you make an informed decision about which one is right for you.
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