How Much Tax Will I Pay as Self-Employed in the UK?
Introduction
Becoming self-employed in the UK can be an exciting and rewarding venture. Whether you’re a freelancer, consultant, or running your own business, being your own boss offers flexibility and the potential for financial independence. However, with this freedom comes the responsibility of managing your own taxes. Understanding how much tax you will pay as a self-employed individual in the UK is crucial for financial planning and compliance with HM Revenue and Customs (HMRC) regulations.
In this comprehensive guide, we will explore the various taxes that self-employed individuals in the UK are required to pay, how to calculate your tax liability, and tips for managing your tax obligations effectively. By the end of this blog, you should have a clear understanding of your tax responsibilities and be better equipped to navigate the UK tax system as a self-employed individual.
1. Understanding Self-Employment in the UK
1.1 What Does It Mean to Be Self-Employed?
In the UK, you are considered self-employed if you run your own business as an individual, work as a freelancer or contractor, or are part of a partnership. Unlike employees, self-employed individuals are responsible for managing their own taxes, National Insurance contributions, and other financial obligations.
1.2 Registering as Self-Employed
If you are self-employed, you must register with HMRC as soon as possible. You can do this online through the HMRC website. Once registered, you will receive a Unique Taxpayer Reference (UTR) number, which you will need for filing your tax returns.
1.3 Keeping Records
As a self-employed individual, it is essential to keep accurate records of your income and expenses. This will not only help you manage your finances but also ensure that you can complete your tax returns accurately and on time.
2. Taxes for Self-Employed Individuals in the UK
Self-employed individuals in the UK are subject to several types of taxes, including:
- Income Tax
- National Insurance Contributions (NICs)
- Value Added Tax (VAT) (if applicable)
- Business Rates (if applicable)
- Corporation Tax (if you operate as a limited company)
In this section, we will focus on the main taxes that most self-employed individuals will encounter: Income Tax and National Insurance Contributions.
2.1 Income Tax
Income Tax is a tax on your earnings, including profits from your self-employment. The amount of Income Tax you pay depends on your taxable income, which is your total income minus any allowable expenses and tax reliefs.
2.1.1 Income Tax Rates and Bands (2023/2024 Tax Year)
For the 2023/2024 tax year, the Income Tax rates and bands for individuals in England, Wales, and Northern Ireland are as follows:
- Personal Allowance: Up to £12,570 – 0% tax
- Basic Rate: £12,571 to £50,270 – 20% tax
- Higher Rate: £50,271 to £125,140 – 40% tax
- Additional Rate: Over £125,140 – 45% tax
In Scotland, the Income Tax rates and bands are slightly different:
- Personal Allowance: Up to £12,570 – 0% tax
- Starter Rate: £12,571 to £14,732 – 19% tax
- Basic Rate: £14,733 to £25,688 – 20% tax
- Intermediate Rate: £25,689 to £43,662 – 21% tax
- Higher Rate: £43,663 to £125,140 – 41% tax
- Top Rate: Over £125,140 – 46% tax
2.1.2 Calculating Your Income Tax
To calculate your Income Tax, you need to determine your taxable income. This is done by subtracting your allowable expenses and any tax reliefs from your total income.
Example:
Let’s say you are a self-employed graphic designer in England, and your total income for the 2023/2024 tax year is £60,000. Your allowable expenses amount to £10,000.
Step 1: Calculate Taxable Income
Total Income: £60,000
Allowable Expenses: £10,000
Taxable Income: £60,000 – £10,000 = £50,000
Step 2: Apply the Tax Bands
- Personal Allowance: £12,570 – 0% tax = £0
- Basic Rate: £12,571 to £50,270 – 20% tax
£50,000 – £12,570 = £37,430
£37,430 x 20% = £7,486
Total Income Tax: £0 + £7,486 = £7,486
2.2 National Insurance Contributions (NICs)
National Insurance Contributions (NICs) are payments made by self-employed individuals to qualify for certain state benefits, such as the State Pension. There are two main types of NICs for self-employed individuals: Class 2 and Class 4.
2.2.1 Class 2 NICs
Class 2 NICs are a flat-rate contribution paid by self-employed individuals who earn above a certain threshold. For the 2023/2024 tax year, the Class 2 NICs rate is £3.45 per week, and the threshold is £6,725 per year.
If your profits are below the threshold, you do not need to pay Class 2 NICs, but you may choose to do so voluntarily to maintain your entitlement to certain benefits.
2.2.2 Class 4 NICs
Class 4 NICs are based on your profits and are paid in addition to Class 2 NICs. For the 2023/2024 tax year, the Class 4 NICs rates are as follows:
- 9% on profits between £12,570 and £50,270
- 2% on profits over £50,270
Example:
Using the same example as above, where your taxable income is £50,000:
Step 1: Calculate Class 2 NICs
£3.45 per week x 52 weeks = £179.40
Step 2: Calculate Class 4 NICs
- 9% on profits between £12,570 and £50,270:
£50,000 – £12,570 = £37,430
£37,430 x 9% = £3,368.70 - 2% on profits over £50,270:
£50,000 is below the £50,270 threshold, so no additional Class 4 NICs are due.
Total NICs: £179.40 + £3,368.70 = £3,548.10
2.3 Value Added Tax (VAT)
Value Added Tax (VAT) is a consumption tax levied on the sale of goods and services. If your self-employed business has a taxable turnover above the VAT threshold (currently £85,000 for the 2023/2024 tax year), you must register for VAT and charge VAT on your sales.
2.3.1 VAT Rates
There are three main VAT rates in the UK:
- Standard Rate: 20% (applies to most goods and services)
- Reduced Rate: 5% (applies to certain goods and services, such as home energy)
- Zero Rate: 0% (applies to certain goods and services, such as most food and children’s clothing)
2.3.2 VAT Registration
If your taxable turnover exceeds the VAT threshold, you must register for VAT with HMRC. Once registered, you will need to submit VAT returns, usually on a quarterly basis, and pay any VAT due to HMRC.
2.3.3 VAT Flat Rate Scheme
The VAT Flat Rate Scheme is a simplified VAT accounting scheme available to small businesses with a taxable turnover of £150,000 or less (excluding VAT). Under this scheme, you pay a fixed percentage of your turnover as VAT, and you cannot reclaim VAT on most purchases.
2.4 Business Rates
Business Rates are a tax on non-domestic properties, such as offices, shops, and warehouses. If you operate your self-employed business from a commercial property, you may be liable to pay Business Rates.
2.4.1 Small Business Rate Relief
If your business property has a rateable value of £15,000 or less, you may be eligible for Small Business Rate Relief, which can reduce your Business Rates bill.
2.5 Corporation Tax
If you operate your self-employed business as a limited company, you will be subject to Corporation Tax on your company’s profits. Corporation Tax is separate from Income Tax and is paid by the company rather than the individual.
2.5.1 Corporation Tax Rates
For the 2023/2024 tax year, the Corporation Tax rate is 19% for profits up to £50,000. For profits between £50,001 and £250,000, the rate is 25%. Profits above £250,000 are taxed at 25%.
3. Allowable Expenses for Self-Employed Individuals
One of the key ways to reduce your taxable income as a self-employed individual is to claim allowable expenses. Allowable expenses are costs that are incurred wholly and exclusively for the purpose of running your business. By deducting these expenses from your total income, you can lower your taxable income and, consequently, your tax liability.
3.1 Common Allowable Expenses
Some common allowable expenses for self-employed individuals include:
- Office Costs: Rent, utilities, office supplies, and business rates for your workspace.
- Travel Costs: Mileage, public transport fares, and accommodation for business trips.
- Stock and Materials: Costs of goods you sell or materials you use to provide your services.
- Marketing and Advertising: Costs of promoting your business, such as website hosting, online ads, and business cards.
- Professional Fees: Accountancy fees, legal fees, and membership fees for professional bodies.
- Insurance: Business insurance, such as public liability insurance and professional indemnity insurance.
- Training: Costs of training courses that are directly related to your business.
- Use of Home: If you work from home, you can claim a proportion of your household expenses, such as rent, mortgage interest, utilities, and internet.
3.2 Capital Allowances
Capital allowances are a type of tax relief for certain capital expenditures, such as equipment, machinery, and vehicles used for your business. Instead of deducting the full cost of these items as an expense, you can claim capital allowances over several years.
3.2.1 Annual Investment Allowance (AIA)
The Annual Investment Allowance (AIA) allows you to deduct the full value of qualifying capital expenditures up to a certain limit. For the 2023/2024 tax year, the AIA limit is £1 million.
3.2.2 Writing Down Allowance (WDA)
If your capital expenditures exceed the AIA limit, you can claim a Writing Down Allowance (WDA) on the remaining balance. The WDA rate is 18% for main rate assets and 6% for special rate assets.
3.3 Simplified Expenses
If you find it difficult to calculate your allowable expenses, you may be able to use simplified expenses. Simplified expenses are flat rates that you can use to calculate certain expenses, such as mileage, use of home, and living in your business premises.
3.3.1 Mileage Allowance
If you use your personal vehicle for business purposes, you can claim a mileage allowance instead of calculating the actual costs. For cars and vans, the mileage allowance is 45p per mile for the first 10,000 miles and 25p per mile thereafter.
3.3.2 Use of Home Allowance
If you work from home, you can claim a flat rate for your household expenses based on the number of hours you work from home each month. The rates are as follows:
- 25 to 50 hours: £10 per month
- 51 to 100 hours: £18 per month
- 101 or more hours: £26 per month
4. Filing Your Self-Assessment Tax Return
As a self-employed individual in the UK, you are required to file a Self-Assessment tax return each year. This is how you report your income and expenses to HMRC and calculate your tax liability.
4.1 Deadlines for Filing Your Tax Return
The tax year in the UK runs from April 6 to April 5 of the following year. The deadlines for filing your Self-Assessment tax return are as follows:
- Paper Tax Return: Must be filed by October 31 following the end of the tax year.
- Online Tax Return: Must be filed by January 31 following the end of the tax year.
4.2 Payment Deadlines
The deadlines for paying your tax bill are as follows:
- January 31: Payment of any tax due for the previous tax year and the first payment on account for the current tax year.
- July 31: Second payment on account for the current tax year.
4.3 Payments on Account
Payments on account are advance payments towards your tax bill for the current tax year. They are based on your tax liability for the previous tax year and are split into two equal installments.
Example:
If your tax liability for the 2022/2023 tax year was £5,000, your payments on account for the 2023/2024 tax year would be:
- First Payment on Account: £2,500 (due by January 31, 2024)
- Second Payment on Account: £2,500 (due by July 31, 2024)
If your tax liability for the 2023/2024 tax year is higher or lower than the previous year, you may need to make a balancing payment or receive a refund.
4.4 Penalties for Late Filing and Payment
If you fail to file your tax return or pay your tax bill on time, you may be subject to penalties and interest charges. The penalties for late filing are as follows:
- 1 day late: £100 penalty
- 3 months late: £10 per day, up to a maximum of £900
- 6 months late: £300 or 5% of the tax due, whichever is higher
- 12 months late: £300 or 5% of the tax due, whichever is higher
In addition to these penalties, you may also be charged interest on any unpaid tax.
5. Tips for Managing Your Tax Obligations
Managing your tax obligations as a self-employed individual can be challenging, but with proper planning and organization, you can stay on top of your finances and avoid any surprises at tax time.
5.1 Keep Accurate Records
Keeping accurate records of your income and expenses is essential for completing your tax return accurately and on time. Consider using accounting software or hiring an accountant to help you manage your finances.
5.2 Set Aside Money for Taxes
As a self-employed individual, you are responsible for paying your own taxes, so it’s important to set aside money throughout the year to cover your tax bill. A good rule of thumb is to set aside around 25-30% of your income for taxes.
5.3 Make Payments on Account
If you are required to make payments on account, be sure to budget for these payments and pay them on time to avoid penalties and interest charges.
5.4 Claim All Allowable Expenses
Make sure to claim all allowable expenses to reduce your taxable income and lower your tax liability. Keep receipts and invoices for all business-related expenses.
5.5 Consider Hiring an Accountant
If you find managing your taxes overwhelming, consider hiring an accountant or tax advisor. They can help you navigate the tax system, ensure that you are claiming all allowable expenses, and help you avoid costly mistakes.
5.6 Stay Informed About Tax Changes
Tax laws and rates can change from year to year, so it’s important to stay informed about any changes that may affect your tax liability. HMRC provides updates and guidance on their website, and you can also consult with a tax professional for advice.
6. Conclusion
Being self-employed in the UK comes with many benefits, but it also comes with the responsibility of managing your own taxes. Understanding how much tax you will pay as a self-employed individual is crucial for financial planning and compliance with HMRC regulations.
In this guide, we have covered the main taxes that self-employed individuals in the UK are required to pay, including Income Tax, National Insurance Contributions, VAT, Business Rates, and Corporation Tax. We have also discussed how to calculate your tax liability, claim allowable expenses, and file your Self-Assessment tax return.
By keeping accurate records, setting aside money for taxes, and staying informed about tax changes, you can manage your tax obligations effectively and avoid any surprises at tax time. If you find managing your taxes overwhelming, consider hiring an accountant or tax advisor to help you navigate the tax system and ensure that you are meeting all of your obligations.
Remember, being self-employed is a journey, and managing your taxes is just one part of the process. With proper planning and organization, you can focus on growing your business and achieving your financial goals.