Tax And National Insurance When You’re Self-Employed

Self-employment tax generally refers to the tax bill of sole traders and freelancers. After initially registering as self-employed, sole traders are expected to figure out how to calculate self-employment tax themselves. It’s a big jump, going…

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Last Updated: 5th April 2023

Self-employment tax generally refers to the tax bill of sole traders and freelancers. After initially registering as self-employed, sole traders are expected to figure out how to calculate self-employment tax themselves.

It’s a big jump, going from employee to being solely in charge of your accounts. So, to help you get to grips with how to pay self-employment tax, this guide covers everything you need to know about Income Tax and National Insurance contributions.

REGISTERING AS SELF-EMPLOYED

Before you can pay any tax, you need to register as self-employed. It’s easy to do, simply visit HMRC’s sign-up page or alternatively call their helpline on 0300 200 3310 if you need further support.

It’s important that you register as self-employed immediately. Failure to do so can result in you being fined up to £100. You must register by 5th October following the end of the tax year in which you started your business.

As part of self-employment, you’ll need to keep business records and complete and submit a Self Assessment tax return every year – as well as pay Income Tax and Class 2 and possibly Class 4 National Insurance, depending on how much profit you make.

HOW MUCH CAN YOU EARN WITHOUT PAYING TAX?

If during the tax year, your only income is from self-employment and your profits are less than the £12,570 Personal Allowance, then you will not pay any Income Tax. You may, however, need to pay National Insurance as the thresholds for paying these taxes are much lower.

If you have other income during the tax year, then the amount of tax you pay will need to take into consideration this other income.

Relevant income includes:

  • Wages
  • Profit from self-employment
  • Pensions
  • Rental income
  • Trust income
  • Interest on savings

HOW MUCH INCOME TAX DO YOU NEED TO PAY?

For those of you still wondering “what’s my tax bill?”, let us explain. Sole traders only pay Income Tax on profits – not total income. This means you deduct your business expenses from your total income to work out your taxable income or ‘profit’.

This ‘profit’ is what you will then pay Income Tax and National Insurance on, provided that it exceeds the £12,570 Personal Allowance.

The Income Tax bands are as follows:

BandTaxable income    Tax rate
Personal Allowance   Up to £12,5700%
Basic rate £12,571 to £50,27020%
Higher rate£50,271 to £125,14040%
Additional rateOver £125,140
45%

These bands are different in Scotland. If this affects you, please find out more here.

The rate of tax isn’t applied to the entire sum, only the profit you make between the brackets. So, if you earned £20,000, you would pay 20% tax on the £7,430 in excess of the Personal Allowance. Once you’ve figured out your taxable income, the next step is to determine any other contributions and figure out how to pay self-employment tax.

DO YOU NEED TO MAKE NATIONAL INSURANCE CONTRIBUTIONS?

National Insurance contributions go towards state benefits, whether that’s your pension or welfare support like Universal Credit.

Whereas employees have such contributions (Class 1) taken directly out of their earned income, the majority of self-employed people pay National Insurance contributions, given that they’re making at least £6,725 in profit. Once over this amount, they will pay £3.45 weekly (Class 2).

If you’re self-employed and are making profits of £12,570 or higher, you’ll pay 9% on profits between £12,570 and £50,270, and 2% on anything above (Class 4).

WHAT ABOUT CORPORATION TAX?

Provided you’re a sole trader and identify as such, you’ll only need to submit your Self Assessment tax return. You do not need to pay Corporation Tax – this is only paid by limited companies.

HOW TO PAY SELF-EMPLOYMENT TAX AND NATIONAL INSURANCE

Once you have collated all your information, all that’s left to do is file your Self Assessment tax return.

If you’re choosing to do this via a paper submission, you’ll need to complete your Self Assessment tax return by 31st October. If you file before the 31st October, HMRC will send you a tax calculation and detail what tax needs to be paid and by when.

However, should you prefer a few more months to organise your affairs – and an easier submission – digital Self Assessment tax returns are due on 31st January. Software is available to help you file a tax return in this way, and it will calculate the tax you owe and advise you of this. It is worth noting that the deadline for both filing your online tax return and paying any taxes due is the 31st January.

At GoSimpleTax, we make self-employment tax straightforward. Want somewhere to store records of your business expenses? Take a photo of your receipts and we’ll log them. Want your National Insurance automatically calculated? We can do that for you too.

We remove the need for never-ending forms and exhausting evenings spent staring at a calculator. All you need to do is enter your income and expenditure details, and we’ll fill in your tax return for you. Get in touch and explore our software today with a freemium account.

Self Employed National Insurance Frequently Asked Questions

  • Do Self Employed Need to Pay National Insurance?

    If you’ve made more than £6,724 in profit (2022/2023) you’ll need to pay national insurance contributions

  • What Are Class 2 National Insurance Contributions?

    These are payments of £3.15 made weekly by self employed people who made a profit in the 2022 / 2023 tax year between £6,725 and £9,880.

  • What are Class 4 National Insurance Contributions?

    These are payments of made weekly by self employed people who made a profit in the 2022 / 2023 tax year between £9,880 and £50,270. The payment is based on 9% of profits

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Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.

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