The prime reason an employee bids farewell to their traditional job and makes a land in self-employment is because it offers enough flexibility, limitless independence, and absolute control over business. How much tax do I pay as self-employed? This is the question you would want to know the answer to if you are self-employed in the UK.
However, like any other business venture, self-employment also comes with certain obligations, the most significant of which are tax responsibilities. Therefore, understanding how much tax you need to pay is essential for managing your finances and staying compliant with HMRC regulations.
To this end, this guide breaks down the different types of taxes self-employed individuals must pay, the steps on how they are calculated, and the key deadlines you should be aware of in order to stay compliant with HMRC regulations.
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How much tax do I pay as self-employed worker?
Unlike traditional employees, whose taxes are deducted through the PAYE (Pay As You Earn) system, being a self-employed worker, you must report and pay your own taxes through a Self-Assessment tax return in January every year. The key taxes that self-employed individuals are obligated to pay include:
- Income Tax, which is based on your annual earnings.
- National Insurance Contributions (NICs) are paid to qualify for state benefits and pensions.
- VAT if your annual turnover exceeds the current VAT threshold (£90,000 for the 2024/25 tax year).
Now, the following steps expound on all the tax obligations and how you must fulfil them so that you get the answer to the question, how much tax do I pay as self-employed worker?
Without any further ado, let’s start!
Calculate your taxable income:
Before you know, how much tax do I pay as self-employed worker, you must work out your total taxable income since it will determine how much tax you owe. Your taxable income refers to your total earnings minus any business-related expenses.
These expenses are the costs that are indispensable for the running of your business, such as office equipment, travel, or a part of your home office expenses. As these expenses are crucial, HMRC allows you to subtract them from your business profits or earnings to reduce your tax bill.
Consequently, these expenses are called tax-deductible or allowable expenses. To learn what costs these allowable expenses incorporate, read our detailed guide:
What are allowable expenses for self-employed people in the UK?
Calculate your Income Tax:
After subtracting your business expenses from your total earnings, the rest of your income is subject to income tax. However, there is a crucial component of personal allowance in income tax, which is worth highlighting here.
Please note that you will pay income tax only if you earn over a certain threshold of £12,570. This threshold is known as the personal tax allowance or the tax-free allowance, meaning no tax is paid on this amount. Above the personal allowance, your income would be taxed at the following rates based on the relevant tax bands:
| Tax Band | Tax Rate (%) | Taxable Income |
| Personal Allowance | 0 | Up to £12,570 |
| Basic Rate | 20 | £12,571 to £50,270 |
| Higher Rate | 40 | £50,271 to £125,140 |
| Additional Rate | 45 | over £125,140 |
Further elaborating, if your income is below £100,000 in a tax year, you can claim a tax-free income of £12,570, called the personal allowance. On the contrary, if you earn over £100,000, this allowance decreases by £1 for every £2 of income above £100,000.
Similarly, if you are earning above £125,000, you cannot claim a personal allowance. For greater clarity on how the income tax is calculated, consider the following example:
Assume if your taxable income is £60,000 annually, your income tax calculation will be:
£12,570 tax-free (Personal Allowance)#
£37,700 taxed at 20% = £7,540
£9,730 taxed at 40% = £3,892
Consequently, your total income tax = £11,432 on your taxable income of £60,000
Finally, you are advised to stay informed of any changes made in the tax rates as the new tax year commences. Hence, keep visiting the government website for the updated figure:
Calculate National Insurance Contributions (NICs):
National insurance is another crucial deduction made from your taxable profits when you are considering how much tax do I pay as self-employed. Self-employed individuals must pay Class 2 and Class 4 NICs on their earnings.
Class 2 NICs = £3.45 per week if your profits are less than £6,725 a year.
However, pursuant to HMRC guidelines, Class 2 contributions are considered paid for the purpose of protecting your National Insurance record. As a result, you do not have to pay Class 2 contributions. Nevertheless, if your annual earnings exceed £12,570, you must pay Class 4 contributions.
Now, for tax year 2024/25, you will need to pay:
- 6% on profits from £12,570 to £50,270 (i.e., profits between the lower threshold and upper threshold)
- 2% on any profits above the upper threshold, i.e., £50,270.
Let’s understand with the following example:
Consider your annual profit is £60,000.
Then, Class 2 NICs= £3.45 × 52 weeks = £179.40
Moving on, we will calculate the Class 4 NICs. First, we calculate the profit above the lower threshold:
£60,000 – £12,570 = £47,430
Notably, the first part of the Class 4 NICs is calculated on the profits from £12,570 up to £50,270 (the upper threshold), which is £37,700.
Now, 6% on £37,700 = £2,262
The second part is calculated on the profits above the upper threshold. Therefore, the excess profit above £50,270 is:
£60,000 – £50,270 = £9,730
Accordingly,
2% on £9,730 = £194.60
Finally, to get the total NICs, you add Class 2 and Class 4 contributions together:
£179.40 (Class 2) + £2,262 (Class 4 at 6%) + £194.60 (Class 4 at 2%)= £2,636
Ultimately, for an annual profit of £60,000, the total National Insurance Contributions due would be £2,636.
To gather more information on NICs for self-employed, visit the government website.
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VAT (Value Added Tax) If Applicable:
While you look for how much tax do I pay as self-employed, VAT can also fall under your tax obligations if your annual turnover exceeds £90,000 (2024/25 threshold). In this case, you must register for VAT and charge it on your goods and services.
While the standard VAT rate is 20%, there are reduced rates for specific goods and services. Moreover, self-employed individuals can also opt for the VAT Flat Rate Scheme to simplify VAT reporting. Nonetheless, it has different percentage rates depending on your business type.
To learn more about VAT, read our following guides:
How to register for VAT as a self-employed?
How to calculate VAT as a self-employed individual in the UK?
What are different types of VAT Schemes?
Meet the tax deadlines for self-employed workers:
To avoid penalties from HMRC, you must meet the following HMRC deadlines:
- Register for Self-Assessment by 5th October following the end of your first tax year.
- Submit your online tax return by 31st January following the end of the tax year.
- Self-assessment tax returns can be submitted twice a year (January and July).
- The first payment can be made on account by 31st January.
- Similarly, you can make a second payment on account by 31st July.
Lastly, late submissions or payments may incur interest charges and penalties.
Final word:
All in all, understanding how much tax do I pay as self-employed is crucial for managing your tax obligations, financial stability, and compliance with HMRC. By keeping track of income tax, NICs, and VAT where applicable, you can plan and budget effectively for your tax payments.
Nevertheless, it will not be uncommon for you to be indisposed to discharge your tax duties because you are more focused on strategising your business growth. Under such circumstances, it is shrewd to let a financial expert handle your tax affairs on your behalf.
To achieve this, you can rely on location-based, budget-friendly, and certified accountants registered at Accountingfirms. Notably, to provide you with comprehensive and expert guidance, Accountingfirms connects you with registered accountants who can help you with business registration, tax payments, claiming reliefs, and annual accounts submissions.
Beyond that, having a qualified accountant ensures that you stay compliant with HMRC regulations while reaping the benefits of tax efficiencies. Hence, get in touch with a professional today and streamline your self-employed tax affairs!
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.