How is tax treatment different for self-employed individuals?

Self-employed individuals have a unique tax treatment primarily because they operate their own business and are responsible for reporting their financial activities. They must report both their income and allowable business expenses on their tax returns, which is essential for calculating their taxable profit. This process allows self-employed individuals to deduct expenses related to their business from their income, thereby potentially lowering their overall tax liability.

This reporting is crucial because it establishes the basis for their tax obligations to the HM Revenue and Customs (HMRC). Unlike employees whose taxes are automatically deducted from their paychecks, self-employed individuals must proactively track and declare their earnings and expenses each tax year.

In contrast to being exempt from paying taxes or automatically receiving tax credits, self-employed individuals must navigate the tax system actively. They are also required to make national insurance contributions, which can sometimes be higher than those paid by employees, rather than being able to avoid these contributions entirely.