If you’re newly self-employed or thinking it’s time that you set up on your own, you’ll need to know how self-employed tax works and when you need to pay it to avoid a fine from HMRC.
Taking the plunge into self-employment can be a scary decision to make – and that’s before you think about handling your own taxes. This article will show you that it’s much simpler than you might think.
If you are a freelancer or a sole trader, the income tax bands are the same as if you worked for an employer, but you can deduct certain expenses from your earnings. This reduces your profit before your self-employed tax is worked out.
However, if you’re setting up a limited company, you pay corporation tax rates instead. We’ll come to that later.
Not sure how to pay tax if you’re self-employed or what your self-employed tax rates are? Read Telegraph Money’s guide to find out more.
What taxes do self-employed people have to pay?
A freelancer, sole trader or a partnership pays income tax on the profit it makes. Before working out how much tax you must pay, you can deduct certain costs that you’ve incurred during the course of your work – these are called allowable expenses.
You’ll also pay National Insurance contributions (NICs), which help you build up an entitlement to benefits such as your state pension.
If you operate from commercial premises, you may have to pay business rates. When working from home, if only a small portion of your property is used for your work, you do not have to pay business rates.
If you are self-employed and operate through a limited company, then you pay corporation tax on your profits instead of income tax.
Am I self-employed for tax reasons?
Working out if you’re self-employed for tax reasons is not as clear cut as it sounds.
If you run your own business working as a sole trader or freelancer, then in the eyes of HMRC you are self-employed and must register to pay your own tax through the self-assessment system.
When working for an employer full time or part-time, they collect your tax and National Insurance directly from your pay packet, known as Pay As You Earn (PAYE).
While that seems straightforward, there is a grey area. For example, if you have a contract with a company to supply your services. Depending on the circumstances of that work and details of the contract, you could be classed as employed or self-employed.
If you’re required to turn up to work at a certain time, work at their premises and work under supervision you may be classed as employed for tax purposes.
You can use HMRC’s tool to establish if you are employed or self-employed for tax reasons.
How much can I earn self-employed tax-free?
You can earn up to £12,570 self-employed tax free. Tax is paid on your remaining taxable profit after your personal allowance has been deducted.
Additional rate taxpayers do not receive a tax-free allowance.
The tax band thresholds for sole traders, freelancers and partnerships are the same as those applied to employed workers. If your expenses are below £1,000, then you can claim an additional £1,000 allowance tax free.
How much tax will I pay?
If you’re in your first year of trading, you may be thinking, “How much tax do I pay if I’m self-employed?”
It all depends what your taxable profit is after allowable expenses have been deducted.
If you earn £12,570 or less, you will pay no tax, but you must still register for self-assessment and file a tax return if you expect to earn more than £1,000.
Self-employed tax rates
There are four different tax rates. You could have multiple tax rates applied to your profit to calculate your tax bill if your profits span more than one tax band.
For example, if you earned £60,000 in taxable profit, three tax rates would be applied to your profit – a 0pc tax rate would be applied to the first £12,570; on the next £37,700 a basic rate of 20pc is applied, followed by a 40pc higher rate which is applied to the final £9,730.
Calculator
To calculate how much your self-employed tax bill is you can use HMRC’s self-employed income tax calculator.
How to do a self-employed tax return
You will need to file a self-employed tax return if you earned more than £1,000 before any tax relief deductions. You can instruct an accountant to do your tax return or you can file one yourself online after you have registered.
Read Telegraph Money’s guide on completing your tax return.
Make sure you leave enough time to complete your tax return, especially if it is your first time. It takes up to two weeks to receive your Unique Taxpayer Reference number in the post after you have registered. You need these details to log in to the government website and complete your return.
Filing your return late may incur penalties and interest on late payments. Here are three key dates for your calendar to avoid filing late:
How to register for self-assessment
You can register online to complete your self-assessment. You must register if you expect to earn more than £1,000 in the tax year. A tax year runs from April 6 to April 5.
The deadline for you to register is Oct 5 in the tax year following the one in which you set up your business. So if you set up your business in Aug 2024, which falls within the 2024/25 tax year, you must register by Oct 5 2025 which lands in the tax year 2025/26.
When you register you generate a Government Gateway user ID by filling out an online form. Once this is done, you’ll receive a Unique Taxpayer Reference number in the post. You need this to log on to the Government Gateway which is the portal you enter to complete your self-assessment tax return.
What if I have another job?
It’s okay to be employed and self-employed at the same time, just make sure HMRC is aware of your dual status. The tax you pay is based on your combined earnings but it is worked out in two different ways.
For your employed work, your employer will deduct your tax and National Insurance from your total earnings before paying you.
For your self-employed business, you must pay your own tax on profits after expenses (not your total earnings) through the self-assessment system.
Declare to HMRC that you have an employed job. You’ll also be asked on your tax return about income from other sources. Your employer will provide you with a form including a reference number which you will enter into your tax return.
Your personal allowance usually only applies to one of your jobs, which is usually the one in which you earn the most.
Rachael Griffin, tax and financial planning expert at Quilter, explained: “If, for example, you were earning £30,000 a year from your employment and also earned £20,000 taxable profit on your self-employed earnings, you would potentially have to pay the basic rate of tax on all these self-employed earnings.
“However, as a self-employed person you may be entitled to deduct expenses such as office and travel costs which can lower this tax bill.”
What if I’ve registered as a limited company?
Self-employed business owners who have registered as a limited company pay corporation tax on their taxable profits instead of income tax.
On profits below £50,000, companies pay a small profits rate of 19pc. Companies with profits above £250,000 pay the main rate of 25pc. Those with profits falling in between these ranges pay tax at 25pc reduced by a marginal relief.
You must register to pay corporation tax within three months of starting to trade, and list your company on Companies House. You can also register for PAYE as an employer at the same time if you plan to take on staff.
Limited company owners must file a corporation tax return and file accounts to Companies House once a year.
It’s likely that you’ll complete a self-assessment tax return too. A limited company is a separate legal entity from the owner, so by completing the corporation tax return you are declaring what profit the company made.
Any money you have earned from the company, such as dividends, must be declared on your self-assessment tax return.
National insurance if you’re self-employed
Just like employed workers, if you’re self-employed and earning more than £6,725 a year in taxable profit, you must pay National Insurance contributions NICs are used to fund the state pension and other benefits as well as contribute to the NHS.
These are paid through your self-assessment tax return. The Government recently made changes to the rates and structure which took effect from April 6 2024.
There are two types of NICs which apply to the self-employed: class two, which prior to April 6 was a flat weekly rate set at £3.45, and class four, which has dropped from 9pc to 6pc for trading profits between £12,570 and £50,269. For profits of £50, 270 or more a rate of 2pc is charged.
Since the changes took effect, the class two charge has been abolished, however those earning £6,725 or less can choose to make voluntary contributions to build up their NICs record so that they qualify for the full state pension.
Although the class two contribution is no longer mandatory, it is considered as being paid for those earning £6,725 or more to protect your National Insurance record.
Disclaimer: The copyright of this article belongs to the original author. Reposting this article is solely for the purpose of information dissemination and does not constitute any investment advice. If there is any infringement, please contact us immediately. We will make corrections or deletions as necessary. Thank you.
