Trying to figure out how self employed tax works? Worried about what you should pay, do and tell HMRC about now that you’re working for yourself? Then keep reading!
If you’re self-employed then understand what type of tax you need to pay and when is an essential part of business because you’re responsible for managing your own taxes and could face penalties for making mistakes.
Over recent years, HMRC has tried to simplify taxes for the self-employed but it can still be a challenge to get to grips with. The good news is that it isn’t that complicated to understand, even if you’re employed and self-employed.
In this guide, you’ll learn everything you need to know about self-employment tax and national insurance including:
- What self-employment taxes you need to pay and the 2023-24 tax rates
- How to calculate how much tax you’ll pay
- When and how to pay HMRC
This guide is for sole traders and side hustlers. Different tax rules apply if you have a Limited Company.
Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
What Tax and National Insurance Do You Pay When You’re Self-Employed?
Self-employed individuals in the UK pay three types of tax on their taxable business profits**:
- Income tax
- Class 2 national insurance
- Class 4 national insurance
** Taxable business profits means all your business income minus your allowable business expenses.
Self Employed Tax Rates 2023-24
Different rates apply to each of self employed tax and they have their own tax free thresholds. This is a summary of the rates:
UK Tax Year
The UK tax year runs from 6 April to 5 April each year, with any changes to tax rates taking effect at the start of each new tax year. So the amount of tax you pay will probably change every year.
Income Tax for Sole Traders
You’ll pay income tax on your taxable profits – the more you make, the more income tax you pay. But it’s on a sliding scale, so you’ll pay different rates depending on the portion of your profits that falls into each tax band.
Income Tax Rates for Tax Year* 2023-24
England & Wales
- 0%: £0 to £12,570 (personal allowance)
- 20%: £12,571 to £50,270 (basic rate)
- 40%: £50,271 to £100,000 (higher rate)
- 60%: £100,001 to £125,139 (higher rate + personal allowance restriction)
- 45%: Over £125,140 (additional rate)
Scotland
- 0%: £0 to £12,570 (personal allowance)
- 19%: £12,571 to £14,732 (starter rate)
- 20%: £14,733 to £25,688 (basic rate)
- 21%: £25,689 to £43,662 (intermediate rate)
- 42%: £43,663 to £100,000 (higher rate)
- 63%: £100,001 to £125,140 (higher rate + personal allowance restriction)
- 47%: Over £125,141 (top rate)
* the tax year runs from 6 April to 5 April
Here’s an example:
You live in England and your taxable business profits are £40,000 for the tax year 2023-24. You have no other forms of income. You’ll pay income tax of £5,486.20 which is calculated as:
- 0% on the first £12,570
- 20% on the next £27,430
Income tax is paid on all your taxable earnings. So if you are employed and self-employed, the tax brackets you’ll fall into will be based on your combined taxable business profits and your gross salary.
Here’s an example:
You live in England, earning £40,000 gross salary from your job and £20,000 from your side hustle. The amount of income tax you pay is based on your combined income of £60,000 so you’ll pay income tax of £11,432.60 which is calculated as:
- 0% on the first £12,570
- 20% on the next £37,700
- 40% on the remaining £9,730
Your combined earnings mean that you are now paying the higher rate tax of 40%. You’ll most likely receive your personal allowance through your payslip.
Read this guide about tax when you’re employed and self employed to find out more about what you need to check on your payslip.
National Insurance Rates for the Self-Employed
Being self-employed, you’ll also pay National Insurance on your taxable business profits in addition to income tax.
You won’t pay any class 2 NICs if you earn up to the tax-free thresholds and it’s unrelated to any other income you have.
If you are employed in a job, you’ll still need to pay Class 1 NI on your employment earnings on your payslip. However, your employer will take responsibility for calculating your class 1 NICs for you.
Self Employed National Insurance Rates for Tax Year* 2023-24
- Class 2 NI £3.45 per week on taxable profits over £6,725
- Class 4 NI 9% on taxable profits between £12,570 to £50,270 and 2% thereafter
* the tax year runs from 6 April to 5 April
Here’s an example:
Your taxable business profits are £40,000 for the tax year 2023-24. You’ll pay national insurance of £2,648.19 which is calculated as:
- Class 2 National Insurance £179.40
- Class 4 National Insurance £2,468.79
How to Calculate How Much Self-Employment Tax You’ll Pay
Follow these 5 steps to calculate how much tax you’ll need to pay on your self-employed business income:
- Choose your accounting period
- Summarise your income and expenses
- Calculate your taxable business profits
- Estimate your income tax and national insurance using the rates for your accounting period
- Calculate your payment on account
Step #1: Choose Your Accounting Period
An accounting period is the period of time used to report income and expenses to HMRC. It is usually 12 months unless starting or stopping self-employment.
As a sole trader, the easiest way to report your taxable profits to HMRC and pay tax is to use the same accounting period as the tax year – it makes filling in your tax return and estimating your tax bill simpler.
The tax year runs from 6 April to 5 April but to help simplify reporting for sole traders HMRC allows the time frame 1 March to 31 March instead.
Step #2: Summarise Your Income and Expenses
To calculate your business profits, you’ll need to add up your total income and expenses for your accounting period. Take a look at your bank statements, Paypal account and stripe account, and any invoices you’ve sent to clients. If you decide to use cash accounting you’ll need to add up everything you’ve paid and been paid on. Whereas if you decide to use traditional accounting, you’ll need to add up according to invoice date, regardless of payment.
Read this step-by-step guide to preparing an income and expenditure statement
If you haven’t opened a separate business bank account, then you may want to consider doing this because it makes adding up your income and expenses much easier.
Award winning banking for sole traders – no monthly fees, digital receipts and 24/7 support – find out more >>
Step #3: Calculate Your Taxable Business Profit
Taxable profit doesn’t always equal business profit because some expenses are disallowable for tax purposes – in other words, you can’t put them on your tax return even if they were work-related.
Examples of disallowable expenses are:
- Fines and penalties eg: parking fines
- HMRC interest and penalties
- Training and coursesfor new skills
- Food, except incertain circ*mstances
- Certain travel
- Personal expenses
Read this guide to find out more about claiming self-employed expenses
To calculate your taxable business profit, check your expenses and ‘add back’ anything that you can’t deduct from your tax bill.
Step #4: Estimate Your Tax & National Insurance
HMRC will calculate how much tax you owe from the numbers you enter onto your tax return, you won’t need to calculate your own self-employed tax bill. But once you have your taxable profit, you can estimate your tax and national insurance using the rates applicable for your accounting period.
Here’s an example:
Your taxable business profits for the 2023-24 tax year are £45,216 and you have no other forms of income. You’ll pay income tax of £6,529.50 which is calculated as:
- 0% on the first £12,570
- 20% on the next £32,646
In addition, you’ll pay class 2 and class 4 national insurance of £3,117.68 which is made up of:
- Class 2 National Insurance £179.40
- Class 4 National Insurance £2,938.28
Your total tax and national insurance bill for your earnings in 2023-24 is £9,647.18 (£6,529.50 + £3,117.68).
Step #5: Calculate Your Payment on Account
In addition to paying your tax bill, you may also need to make an advance payment towards your next tax return bill on 31 January and 31 July. This is known as a payment on account.
You’ll need to make the advance payments:
- If the tax bill for your latest filed return is more than £1,000 excluding class 2 national insurance;
- You pay less than 80% of your total tax bill through your payslip if you’re employed by someone.
You’ll pay 50% of your most recent tax bill. Here’s an example:
Your tax bill for 2023-24, excluding class 2 national insurance is £9,467.78 because this exceeds £1,000 you’ll need to make a payment on account of £4,733.89 (£9,467.78 ÷ 2) by 31 January and 31 July.
Advance payments will be deducted once you file your next tax return. But you’ll also need to make new advance payments.
If you are filing your first tax return and need to make a payment on account, you’ll be paying an extra year of tax before you file your second tax return.
Read this guide to find out more about payments on account and how to reduce them if your income has taken a dip
How You Pay Tax and National Insurance When You’re Self-Employed
You’ll need to file a tax return once a year declaring your taxable business profits. Your tax return is due by 31 January and you’ll need to declare information for the previous tax year.
For example, your tax return for the 2023-24 tax year is due for filing by 31 January 2025. So that gives you around 10 months to fill it in and submit it to HMRC.
In addition, you’ll need to pay any tax you owe (which HMRC will calculate from the information you enter on your form) along with your first payment on account by 31 January. You’ll then need to pay your second payment on account by 31 July.
Here’s an example:
You are self-employed for the tax year 2023-24, your taxable profits are £45,216 and you have no other forms of taxable income. Your tax bill is £9,647.18. Your tax deadlines are:
- File your tax return online by 31 January 2025
- Pay your tax bill of £9,647.18 by 31 January 2025
- Pay your first payment on account of £4,733.89 by 31 January 2025
- Pay your second payment on account of £4,733.89 by 31 July 2025
Related:
- How to Reduce Your Tax Bill if You’re Self-Employed
- Tax When You’re Employed and Self-Employed
- Sole Trader Bookkeeping Spreadsheet
- Self Employed Expenses – What Can You Claim?
- Beginners Guide to Completing Your Tax Return Online
- What is VAT and How Does It Work?
