Are you wondering what tax do I pay as self-employed?
The world of taxes can be very daunting as there are numerous types depending on the circumstance and knowing which tax you pay and for what can be a bit of a minefield.
As the saying goes you can only be sure of two things in life – death and taxes!
A common question from our clients is finding out how they can pay as little tax as possible. It would be nice to never have to pay any form of tax again but unfortunately the purpose of HMRC, as the acronym refers, is to be responsible for revenue services and that includes collecting taxes and enforcing tax laws amongst other roles.
My answer to this question isn’t always what clients want to hear but if you earn it, then you must pay the tax on it -plain and simple.
But what tax do I pay as self-employed?
Here we try to explain the tax that you might pay as a self employed business owner and other responsibilities such as national insurance contributions and payments on account.
This applies to self employed business owners and not corporate companies such as a Limited Company or Limited Liability Partnership (Ltd or LLP).
As a self employed business owner you will need to pay income tax and two types of national insurance contributions (Class 2 and Class 4).
The first important point is that every person who is a UK resident will be granted a tax free amount each tax year (which runs from 6th April one year through to the following 5th April) this is also known as your Personal Allowance.
For the tax year 2021/22 (6th April 2021 – 5th April 2022) this means you can earn (or make a profit from your business) of £12,570 for the year completely tax free!
After which you will start to pay income tax which is based on the profits of your business and is paid usual either once or twice per year depending on your level of profits.
Profit = income less allowable costs
Profit is the difference between the amount you make in sales less any tax deductible expenses.
Income tax is currently (20/21) charged at the below rates:
| Income Band | Taxable Income | Tax rate |
| Personal Allowance | £0 – £12,570 | 0% |
| Basic rate | £12,571 – £50,270 | 20% |
| Higher rate | £50,271 – £150,000 | 40% |
| Additional rate | Over £150,000 | 45% |
See www.gov.uk for updated rates
Most self employed business owners have been employed at some point in their career so you can view the tax you pay as the same type of tax and national insurance you would have seen from your payslips received from your employer with the difference being through employment you paid the required amount monthly where as being self employed you pay one lump sum each year.
Remember you can also earn £1,000 of income (aka sales or turnover) each tax year without being classed as self employed which is known as hobby income.
After calculating your income tax, self employed business owners are also required to pay two types of national insurance contributions which are known as class 2 and class 4.
- Class 2 is set at a fixed amount per week of the tax year for each week that you have been self employed and is currently charged at £3.05 per week.
- Class 4 is a little more complex and similar to income tax in that you get an allowance (£9,569 for 2021/22 tax year) of which any earnings up to this are treated at a rate of 0%, earnings over this but up to £50,270 are charged at 9% and anything over and above this are charges at 2%.
Something which may also be relevant and you may here us talking about is a Payment on Account. Payment on account only applies if the tax due to be paid to HMRC exceeds £2,000 for the year. This is the third and final amount you may have to pay whilst being self employed and this is a 50% payment towards the following tax year bill and will be based on the most recent current tax return numbers.
Example
So let’s put this into an example to show exactly how a income tax and national insurance will be applied.
| Profit from self-employment | £ 56,000 | ||||
| minus | Personal Allowance | £ 12,570 | |||
| Total income on which tax is due | £ 43,430 | ||||
| Basic rate @ 20% | £ 41,500 | X | 20% | £ 8,300 | |
| Higher Rate @ 40% | £ 1,930 | X | 40% | £ 772 | |
| Total income on which tax is charged | £ 43,430 | ||||
| Total income tax charged | £ 9,072 | ||||
| Plus | Class 4 National insurance | ||||
| Allowance at 0% | £ 9,500 | X | 0% | £ – | |
| Lower profit limit @ 9% | £ 40,500 | X | 9% | £ 3,645 | |
| Higher Rate @2% | £ 6,000 | X | 2% | £ 120 | |
| Class 2 National Insurance £3.05 per week | £ 158.60 | ||||
| Total National Insurance contributions due | £ 3,924 | ||||
| TOTAL INCOME TAX AND NATIONAL INSURANCE DUE | £ 12,996 | ||||
Therefore in this example the amount of tax due to be paid is £12,996
